Tax Penalties

Tax Penalties

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We have had a situation where HMRC want to disallow 15% of the loan interest in a rental business, going back a number of years. The business has been making losses and the disallowance will reduce these losses, so there is no tax loss. The Inspector has intimated that penalties can still arise, I cannot find any legislation to confirm if this is correct or indeed how the penalties would be calculated. Can anyone enlighten me?

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By DMGbus
06th Jan 2012 13:37

"Potential lost revenue"

My understanding that penalties in respect of figures declared on tax returnsare based on "Potential Lost Revenue".

So, I suppose HMRC could argue that, even if there's no tax due in one tax year, the enhanced tax loss carried forward from that year through overclaiming interest creates "potential lost revenue" in the future if those losses c/f turn out as a result to be too high.

 

 

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By Steve Kesby
06th Jan 2012 16:57

The Inspector's wrong (probably and kind of)

Prior to 2008/09 any penalty is calculated by reference to the actual tax at stake.  In this case nil.

For 2008/09 onwards the penalty is calculated by reference to "potential lost revenue" (PLR) as DMGBus says.

You need to fully read paragraph 7 of Schedule 24 FA 2008, but based on what you've said, it seems likely that subparagraph 5 will apply:

"The potential lost revenue in respect of a loss is nil where, because of the nature of the loss or P's circumstances, there is no reasonable prospect of the loss being used to support a claim to reduce a tax liability (of any person)."

However, whilst the PLR may be nil a penalty (also of nil) can still be calculated on it.

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Nichola Ross Martin
By Nichola Ross Martin
06th Jan 2012 17:26

Penalties

There may be a penalty if the 15% adjustment creates a tax liability for 2007/08. HMRC is restricted in the number of years it can go back so it really depends on the circumstances as to what is potentially due in earlier years. It seems that it will be only 4 or maybe a push 6.

Sch 24 applies from April 2008.

So the answer to this and questions like it is to fight tooth and claw to resist any adjustment.

In view of the potential penalties you might like some dedictated assistance in doing just that. Please do not hesitate to contact me.

Virtual Tax Partner support for accountants: www.rossmartin.co.uk

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