Unfair penalty?

Unfair penalty?

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Our auditors failed to include a S.419 payment on the Co's tax return. The director repaid the loan 8 months late. HMRC have raised an interest charge on the 8 months (£560), but have suggested a penalty of over £8,000 being the amount of the unpaid tax even though it would have been repaid 8 months later.  Is this fair is the auditor liable?

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By User deleted
06th Nov 2011 10:51

Sounds unfair

First of alll, what do you mean by "8 months late"? - I assume you mean 8 months after the normal due date for the period in which the loan was made?

HMRC will take such s419 (s455) tax into account when charging penalties (I assume the period is within the new penalty regime - previously, Inspectors would tend not to include repayable s419 tax in their calculations). But a 100% penalty does seem harsh. Without knowledge of the actual circumstances it is difficult to comment further but I would be asking the Inspector to explain (a) what penalty category was involved and (b) why no mitigation has been given. I would almost certainly be appealing the penalty level.

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By nick farrow
07th Nov 2011 16:57

at recent CPD course Rebecca B explained a VAT peanlty situation whereby a trader had claimed input tax prematurely on exchange of contracts on a purchase rather than completion - the VAT penalty was eventually very substantially reduced at Tribunal on the grounds that the underpayment was automatically reversing (i.e. just a timing difference) - I would be surprised if the same principle could not apply here

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By User deleted
07th Nov 2011 18:22

Prepare to be surprised then

I find it strange that the level of penalty should be reduced on the basis that the tax due is self-reversing. The criteria for penalty mitigation are clearly set out and self-reversal does not appear to be one of them. The guidance is clear, in that a repayment of tax under s419/s455 is ignored when calcualting the potential lost revenue. But I would expect to see at least some reduction of the penalty based on the usual criteria.

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David Winch
By David Winch
07th Nov 2011 19:15

Is the auditor liable?

Your final query was, "Is the auditor liable?".

The answer is, "possibly".

If the auditor was instructed to deal with the tax returns of the company and was provided with information from which he was (or sensibly should have been) aware that an overdrawn director's loan account position had arisen, then (one would normally think) he should have made the appropriate entries on the company's tax return at the time.

If he had made those entries then - although the s419 tax would still have been due - the penalty would not have arisen.

Auditors carry insurance to cover them against claims from clients.

The best way forward however may be to get the auditor to assist you to minimise the penalty and, once that has been done, to talk to him about either his firm paying the penalty itself or some sort of a fee refund or reduction in future to compensate you.

If the auditor is unwilling to do anything to 'help you' with the penalty then you should get independent legal advice about suing the firm for negligence.

David

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