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HMRC internal manual

International Manual

HM Revenue & Customs
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How the corporate tax regime works for Controlled Foreign Companies: HMRC enquiries: examples of penalty cases

The following examples give some indication of what are likely to be those exceptional cases when penalties will be sought.

Example 1

A company has a 25% interest in a controlled foreign company and has had difficulties in obtaining information necessary to compute the chargeable profits. The United Kingdom company makes genuine efforts to gain access to the controlled foreign company’s records needed to make an accurate return but is blocked by the majority shareholders, the United Kingdom company is not connected with the other shareholders and there is no collusion with them. It bases the figure on a judgement to the best of its ability. Provided that judgement was reasonable in the circumstances no penalty would be claimed if it is later ascertained that the figure is incorrect.

Example 2

As a result of an enquiry, a company agrees with HMRC to reduce a technical reserve deducted in arriving at the chargeable profits of a captive insurance company. Where the company had made a genuine and reasonable attempt to compute an acceptable reserve, no penalty would be claimed.

Example 3

A United Kingdom group places substantial funds in a wholly owned Bermudan subsidiary. The subsidiary places its funds in a bank account with the intention of keeping them there. The United Kingdom company says that the motive test applies. A penalty would be claimed where it is clear that one of the main reasons for the existence of the company was to reduce United Kingdom taxation.

Example 4

A company contends that a controlled foreign company carrying on a financial business passes the exempt activities test. Enquiries reveal that more than 50% of the sales are with group members and that the information was readily available to the United Kingdom company. A penalty would be claimed.

Example 5

As a result of a subsequent adjustment to tax paid locally a foreign company becomes subject to a lower level of taxation after the United Kingdom parent has completed a return. The United Kingdom parent promptly completes a supplementary return including additional controlled foreign company liability. Where the return was made on the best information available at the time no penalty will be charged.