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HMRC internal manual

Specialist Investigations Operational Guidance

Settlement by agreement: consideration of penalties: culpable tax

This instruction applies to penalties charged for periods earlier than those to which Sch 24 FA 2007 and Sch 41 FA 2008 apply. For Sch 24 and Sch 41, see the Compliance Handbook.

The tax and NIC (the ‘culpable tax’) to which the penalty loading is to be applied, is that lost as a result of the failure, or fraudulent or negligent conduct, provided that the time limits for penalty action have not expired (see EM5000).

In many cases the culpable tax is easily calculated. In some cases though, we need to compare the culpable amount with the statutory amount, referred to as the ‘difference’ (see section 95(2) TMA 1970 and paragraph 20(2) Schedule 18 FA 1998). These will generally be cases where there was an error in the original return in the Exchequer’s favour which also has to be corrected, or where further entitlement to relief can be made, and cases where there were non-culpable errors in the taxpayer’s favour.

The rule is that the penalty loading should be applied to the lower of the culpable tax and the statutory ‘difference’. SIOG9270 contains some examples.

We also need to consider the time limits, and to double check that we are not extending the calculation of culpable tax beyond the last year for which there is a statutory penalty.