Penalties for incorrect returns

Penalties for incorrect returns

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Following the end of an enquiry into four years returns, inspector has imposed a 20% penalty. Is it normal prosedure to try to negotiate a further reduction of this? A quick brief answer would be much appreciated.
Cathy Ratchford

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David Winch
By David Winch
10th Jan 2006 11:10

Tax underpaid

Cathy

Are you saying that the tax underpaid (not including interest on that tax) amounted to £85K?

If so, you have a problem with 'size and gravity' at least.

This suggests income of more than £200K may have been omitted from returns. That is reasonably sizable.

Also, consider how the omissions arose. There are shades of grey here. Did the client simply get into a muddle which resulted in income slipping in unnoticed? Did he deliberately fail to record some income? Did he create false records or documents (such as bogus expense invoices) to generate false accounts? This will have an effect on the penalty loading.

By all means try to negotiate and do ask how the inspector arrived at a 20% penalty figure.

However do not expect too much. You may find the inspector saying that a 20% penalty is very fair in all the circumstances.

David

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David Winch
By David Winch
10th Jan 2006 11:33

Dealing with the client

Cathy

A 20% penalty is not (in my experience at least) excessive in a case of this size.

By all means try your luck but do ensure the client recognises that the substantial mitigation already obtained is a recognition of co-operation and disclosure (and your efforts on your client's behalf) thus far.

Tell him not to get his hopes up for any further mitigation.

Typically penalties range from zero (but not in a case of this size) to 35%. I think 20% sounds like a good result here (others may disagree).

Good luck!

David

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Chris Caspell CTA TEP
By ccaspell
10th Jan 2006 09:44

20% of what?
It does depend on what the penalty is for, but generally HMRC start from 100% penalty of the tax outstanding and then reduce it dependant upon who discovered the error, how helpful the tax payer was etc. I think that 20% is about the limit that it can be reduced to.

That being said, 20% of £100 is very different from 20% of £10,000 and so, as John says, it is always best to contest it as you don't have very much to loose and everything to gain. Personally though, I don't rate your chances too highly, but good luck anyway.

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By andymeeson
10th Jan 2006 10:04

Always negotiate
The maximum mitigation of penalties under published HMRC practice is 100% - ie full remission of penalty.

This is easily achievable under the right circumstances: the criteria are size and gravity of the offence (up to 40%), co-operation (up to 40%)and disclosure (up to 20% - 30% for unprompted full disclosure).

A 20% penalty means that, in the Inspector's view, some factor in the investigation did not merit the maximum remission for one or other of those criteria. Your view may well differ, in which case it is important to negotiate.

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By John Savage
10th Jan 2006 07:23

In my opinion...
you should always try to negotiate, unless, in very extraordinary circumstances, the inspector's offer is deemed to be very generous. Be positive, reasoned and unafraid to argue!

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