EM6062 - 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.
Example
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 |