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HMRC internal manual

Enquiry Manual

Contract Settlements: Penalties: Abatement - Two or More Tax Geared Penalties

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.

Section 97A (and its CT equivalent in FA98/SCH18) operates to ensure that when two or more tax geared penalties are chargeable on the same tax the aggregate penalty does not exceed the

  • greater or
  • greatest of the penalties.

For example, this could arise where

  • there is a failure to notify, and
  • accounts are sent in which understate the profits for the same year.

There could be

  • a TMA70/S7 penalty based on the full amount of the tax on that source, and
  • a TMA70/S95 penalty based on the ‘tax difference’ between the correct and returned profits.

The penalty will be restricted.


A trader notifies his chargeability for 2002/03 in July 2004.

He submits his accounts in September 2004 showing a tax liability of £10,000.

After a S9A enquiry the true liability is found to be £15,000.

The maximum Section 7 penalty is £15,000
The maximum Section 95 penalty is £5,000
Totalling £20,000

Section 97A would operate to reduce this by the amount of the penalty on the ‘difference’ of £5,000 so that the maximum statutory penalty would be £15,000.


Section 97A is aimed at defining the maximum penalty where there are two or more tax-geared penalties based on the same tax. In practice it is not desired to take a reduced penalty on the same tax more than once.

You should therefore

  • exclude from your calculation any tax which has already been taken into account for penalties
  • apply the appropriate abatements to the culpable tax for each offence
  • take the tax attracting the higher or highest penalty first.

In the example above, if it is decided that the penalty loadings are 10% for the Section 7 offence and 30% for the Section 95 offence the penalty calculation will be

Section 95 Tax difference £5,000 @ 30%   £1,500
Section 7 Tax for year £15,000  
  Less Section 95 penalty £  5,000  
    £10,000 @10% £1,000
Penalty     £2,500


FA98/SCH18/PARA 90