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HMRC internal manual

Specialist Investigations Operational Guidance

Settlement by agreement: consideration of penalties: distinction between culpable and unpaid tax

Unpaid tax to a defined date is the difference between the total tax properly payable for a period and that actually paid.

Only in the simplest cases is culpable tax likely to come to the same amount as unpaid tax. The calculation of the abated penalty is achieved by applying the penalty loading to the amount of culpable tax, not to the amount of unpaid tax.

For penalties under Sch 24 FA 2007 and Sch 41 FA 2008, the concept of ‘potential lost revenue’ is similar to ‘culpable tax’. See the Compliance Handbook for detailed guidance on how to apply these penalties. Penalties under both new and old regimes may be included in a single settlement.

Interest in contrast is calculated by reference to tax unpaid and, with the removal of Section 88 TMA 1970 from the statute (with effect from 1997), it is no longer relevant in that calculation whether the unpaid tax is culpable or not.

Often tax is unpaid on sources or for periods for which there is no taxation offence. Because of this unpaid tax often exceeds culpable tax. This non-culpable tax may be included in a final negotiated settlement to everyone’s convenience. Care must always be taken to make sure that culpable and non-culpable duties are kept separate.

In Code 8 cases the entire settlement may consist of non-culpable tax and, where applicable, interest.

Culpable tax can occasionally exceed unpaid tax. Where a taxpayer makes a false return, but also in error ‘overpays’, the overpayment does not reduce the culpable amount because the calculation of culpability is not by reference to what was paid on the original return but to what would have been payable had it been correct.