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HMRC internal manual

Enquiry Manual

Contract Settlements: Penalties: Abatement - Factors

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.

You can abate (reduce) the maximum penalty by up to

  • 20 percent (and very exceptionally 30 percent) for the amount of disclosure by the taxpayer EM6070 
  • 40 percent for the amount of co-operation received from the taxpayer during the enquiry EM6075 
  • 40 percent for the seriousness of the offences EM6080.

So you could, exceptionally, start with a 100 percent penalty, give abatements of 100 percent, and leave no penalty to pay.

You should always be prepared to explain how you have arrived at what you regard as the appropriate percentage addition for abated penalty by reference to these three factors.

The purpose of these abatements is to encourage and reward the taxpayer who freely discloses information and co-operates fully. They also help ensure that minor offences only suffer minor penalties.

In other words, you should treat

  • more leniently

    • the taxpayer who makes a genuine attempt to put things right as quickly as possible
  • less leniently

    • the taxpayer who is less than frank, or
    • co-operates reluctantly, or
    • withholds co-operation.

Except where there is a means problem EM6214, you should always seek to include in your settlement the full amount of the abated penalty that you have calculated. The three abatement factors mentioned may be linked, for example

  • a taxpayer may fear to disclose or co-operate in the establishment of an offence because of its seriousness, or
  • a disclosure may have been found to be incomplete, co-operation otherwise having been good.

Any such links should be ignored. The deduction under each heading should be the result of a separate and realistic appraisal of that particular abatement factor alone.

Thus, a taxpayer whose offences are of the most serious kind likely to be dealt with locally would

  • with a full and spontaneous disclosure followed by
  • maximum co-operation

qualify for the full deduction for disclosure and co-operation.

Another taxpayer whose offences are less serious would

  • in the absence of disclosure and
  • co-operation

end up with a larger percentage loading.

Where a person has taken a significant period to correct their non-compliance in relation to either an onshore or offshore matter, or they would previously have been able to make a disclosure through one of HMRC’s offshore disclosure facilities, they can no longer expect HMRC to give them the full abatement. A ‘significant period‘ is normally considered to be over 3 years but may be less where the overall disclosure covers a longer period.

Where such a delay has occurred you should reduce the abatement for disclosure by 10 percentage points, see EM6070.