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HMRC internal manual

Enquiry Manual

Contract Settlements: Penalties: Abatement - Structure

The guidance about contract settlements at EM6000+ only relates to direct tax. You must never include VAT or VAT penalties in a contract settlement.

This guidance does not apply to penalties for inaccuracies in returns or other documents with a filing date on or after 1 April 2009 where the return or document relates to a tax period beginning on or after 1 April 2008. Refer to the Compliance Handbook at CH82000+ for help with these penalties.

At the end of your enquiry, you must use the penalty abatement structure set out below to calculate the penalty element of the offer.

This structure is intended to give you considerable scope for discretion. It allows a large variety of circumstances and factors to be taken into account.

It is based upon a maximum penalty of 100% of the culpable tax lost, subject to abatements which recognise three elements in the enquiry,

  • the extent of the taxpayer’s disclosure of irregularities
  • the extent of his co-operation throughout the enquiry, and
  • the seriousness of the offences which are established by the enquiry.

You should apply the net percentage to the culpable tax and NIC not time-barred for penalty proceedings.

For ease of explanation the guidance uses multiples of 5% abatement and loadings.


The nature of the offence may not be the same for all the years covered by the enquiry. For some years there may have been a failure to notify chargeability or a late return. For others there may have been deliberate omissions or understatements of income.

Sometimes the character of the case will change during the period covered by the enquiry. What may have begun as a simply negligent understatement of income may have hardened in the course of time into an out-and-out case of organised fraud.

There may be extremes from innocent error (that is, an error innocent of even neglect) in which event there is no culpability, shading through negligence, to calculated evasion or fraud.

For each offence, you should

  • consider the abatements to be applied by evaluation of all the available evidence, and
  • decide upon the degree of culpability.

In seeking the offer, the penalty should be expressed as a global sum. You should indicate how that sum is made up and explain your reasons for applying different loadings to each offence.