Penalties for tax errors increased

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HMRC has changed the way it calculates penalties charged to taxpayers who have made mistakes in their tax returns or failed to notify HMRC of a tax liability. 

Penalty regime

Where a taxpayer fails to notify HMRC of their tax liability or makes an error (careless or deliberate) in a tax return, HMRC can charge the taxpayer a penalty, calculated as a percentage of the potential lost revenue (PLR).

There are statutory bands set for the range of percentages of PLR that are used for each type of taxpayer behaviour, and which vary according to whether the error was disclosed voluntarily with no prompting by HMRC or disclosed after an HMRC prompt – see table.

penalty table

Where the final penalty sits between the minimum and maximum percentages depends on the quality of the disclosure. “Quality” has three elements: telling (30%), helping (40%), and giving access (30%). The amounts in brackets are the percentage by which the maximum possible penalty is reduced within the statutory range. Each of those elements is judged by HMRC according to its timing, extent and nature.

Timing is important

Timing is a key part of determining the quality of the disclosure. HMRC views an error reported within 12 months of its occurrence or 12 months of the date notification should have been made, as being a higher quality of disclosure than when the same error is reported a significant period after it occurred. This 12-month period is built into the penalties for failure to notify, with lower penalties charged if the notification is made within 12 months of when it should have been made.

Change in practice

This penalty regime came into effect generally from 2008/09, after many years of consultation and negotiation between HMRC and the professional bodies.

Much to the surprise of those professional bodies, HMRC changed its practice in relation to penalties for disclosures made from September 2017. The guidance in its Compliance Handbook manual was changed in paras: CH82410, CH82430, CH72540 and the related pages, without notice. Then in December 2017 all of the compliance check factsheets which refer to penalties were changed to include this text:

If you’ve taken a significant period (normally 3 years) to correct or disclose the inaccuracy we’ll normally restrict the amount of reduction given for disclosure. We’ll restrict the penalty range by 10 percentage points above the minimum to reflect the time taken before working out the reductions for telling, helping and giving.”

Significant period

The HMRC guidance implies that if the error is reported within three years, the maximum mitigation of the penalty is possible. However, the penalty percentages are increased by ten percentage points where errors or failure to notify are disclosed after more than three years.

A careless error reported after three years with no prompting will now carry a minimum penalty of 10% of PLR. A prompted disclosure of an error delayed for over three years carries a minimum penalty of 25%. 

What does it mean?

It is not clear from the guidance what HMRC will count as the start of the three-year significant period. This could be:

  • the date of the error occurred;
  • the end of the tax year or accounting period in which the error or failure occurred; or
  • the date when the error was discovered.

Mike Down, head of tax investigations at RSM, said: “There is an urgent need for HMRC to clarify exactly what their policy now is, to confirm its legal basis, and to explain why they believe this overturning of such a long-standing principle is necessary.”

Advise taxpayers

This change in HMRC practice will affect taxpayers who want to make a voluntary disclosure of careless errors, or of mistakes made while they took due care. In the past, such individuals could make penalty-free disclosures to HMRC, which encouraged compliance and saved time and money as HMRC didn’t have to investigate the matter themselves. 

Now, where the taxpayer discovers an error or their accountant finds it for them, it will be important to make a disclosure to HMRC as soon as is practical. Any delay which takes the disclosure outside the three-year period (to be defined!) could cost the taxpayer a further 10% in penalties.

About Rebecca Cave

Consulting tax editor for I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.


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By Tornado
16th Jan 2018 13:44

Thank you Rebecca.

Are there similar penalty arrangements related to the careless, deliberate and incompetent behaviour of HMRC?

(No need to actually answer that one, I think we all know the answer).

Thanks (9)
to Tornado
17th Jan 2018 10:27

to be honest I am sick to death of the TOTAL incompetence of HMRC - bloody useless is an understatement - if they want to try raising extra penalties then they will have me to deal with!!

Thanks (3)
16th Jan 2018 14:17

We have noticed a distinct change in the questions asked on errors in the past 3 months.

It is now virtually impossible to agree an "innocent" error. Just making a mistake is seemingly not allowed, and the logic would appear to be, if its wrong, you were clearly careless in not checking it properly.

We have had things such as missed child benefit, student loans box not ticked, missing P11D's treated not as a simple correction, but with a tax geared penalty, albeit we have had all such errors suspended.

Thanks (3)
By Tornado
to ireallyshouldknowthisbut
16th Jan 2018 14:24

My attitude to that sort of approach is appeal against everything. I doubt whether HMRC have the resources to deal with tens of thousands of appeals and then perhaps they will realise that taking a more pragmatic and 'risk based' approach to errors is the best way to go.

Thanks (7)
By Tornado
16th Jan 2018 15:55

A classic example of why there should be a clearer, easier and better defined way to be compensated for the errors and incompetence of HMRC.

Thanks (2)
17th Jan 2018 10:07

No idea what they are trying to achieve by doing this, except raise more money from penalties where errors are detected and reported.

Raising the level of penalty will discourage people from admitting to errors, leading to a loss of revenue.

Taxpayers attitude will be 'if they are going to stuff me for a large penalty anyway, then why should I bother'.

It's not going to encourage more voluntary disclosures.

Thanks (10)
to Ian McTernan CTA
17th Jan 2018 11:27

Smacks a little to me of hounding the "little man" for all they can screw them for to finance tax cuts for the "bigger man". Wonder how much HMRC actually rakes in from "fines/penalties" each year, I bet it's an eye watering sum...

Thanks (4)
By Tornado
to jamiea4f
17th Jan 2018 11:36

If there are about 800,000 late filed Self Assessment Returns each year at £100 each, then that alone works out to £80 million.

Thanks (3)
17th Jan 2018 11:37

I had a client recently who had omitted Child Benefit from his 15/16 return, he didn't understand the rules about it and as he didn't receive any child benefit personally didn't think it applied to him. HMRC wrote to him advising he'd missed this out and as a result he contacted us, we then did his 16/17 return including the benefit, explained everything to him and he agreed to pay the outstanding tax.

I spoke to HMRC and they want to fine him almost £1,000 for the error. I raised the point that the penalties are supposed to be an education tool, this error was a lack or knowledge but now he is clear about what he needs to report and he's demonstrated that by making sure his 16/17 return includes the benefit and will do so going forward.

They refused to waive or even suspend the penalty. Absolute sharks, I've appealed of course. The numbskull I spoke to at HMRC claimed to be a manager but he was just a "computer says no" type who you couldn't reason with. It's so frustrating dealing with HMRC these days.

Thanks (3)
to Joe Alderson
17th Jan 2018 11:46

I have a similar case and have appealed. Will let you know how I get on.

Thanks (2)
to Joe Alderson
25th Jan 2018 11:01

we appealed against a 15/16 child benefit error/penalty in similar circumstance and was reduced to nil. Client phoned HMRC directly and gave reason of excessive stress which they accepted.

Thanks (0)
17th Jan 2018 11:44

Well they've got to get some of the £75m (tax gap?) they are losing with Carillion.

Thanks (1)
By JanBA
17th Jan 2018 11:53

So on 13 November 2017, the Independent Police Complaints Commission (IPCC) in case reference (IPCC 2016-068614 HMRC ref: 16170243) made a finding that as a result of " HMRC's OWN FINANCIAL ANALYSIS NOT BEING CHECKED" and "TRAINING AND PROCEDURAL FOR HMRC FINANCIAL INVESTIGATORS" their own officers made substantial errors in estimated income calculations. The HMRC have sought legal media reporting restrictions to ensure their errors do not get reported and the British media appear frightened to expose the failings of the HMRC.

So if members of the public are penalised for errors, what happens when the HMRC's own financial investigators. The HMRC have kept very quiet about their own failings and what they will put in place to address what they term as "Organisational Learning."

It just seems very unfair, one rule for a HMRC Officers and one rule for members of the public.

Thanks (3)
By Tornado
17th Jan 2018 11:56

So much for Theresa May's caring approach then.

We would probably have more respect if we were animals.

Thanks (2)
17th Jan 2018 13:14

Easy money and another knife in the back of your everyday real world tax payer.

It is this attitude as each year passes (it gets worse as each year imo) that I've had serious thoughts of cashing in those chips (assets) and emigrating.

The real world Britain is getting squeezed so hard that I don't know how long it can last. The government take and take be it the tax payer or cut spending. It can't go on like this. What have we got for it in return?

More than happy to pay the tax (in what ever guises it comes in) but when you can't see it at the other end.

God help the country if we get an economic downturn

Thanks (1)
By gordo
17th Jan 2018 13:21

HMRC new published objectives are: Number 1 "maximise revenues".

Thanks (1)
to gordo
17th Jan 2018 15:12

Although HMRC priorities leave a lot to be desired, the wording is "maximise revenues due". No doubt a referal to the 1p in the pound they might get from the carillion liquidators.

Thanks (0)
By gordo
to johnjenkins
20th Jan 2018 11:54

Hi John

I do have photos of other publications by HMRC where they forgot to include that little word 'due', but I don't have the links and forum doesn't allow me to post photo's. The behaviour of HMRC will give us a clue as time goes on. Behaviour is driven by values and HMRC as an organisation, for some reason, decided to change it's values from 'collecting the right amount of tax'. Sadly, I suspect we will see much more of this sort of thing:

Let's hope I am wrong. Watch this space as they say .

Thanks (0)
By Tornado
to gordo
21st Jan 2018 15:09

" HMRC as an organisation"

As an organisation, HMRC are happy to take any amount of criticism as no one takes responsibility theses days. When individuals in HMRC had more responsibility for what they did, we saw more integrity with reasonable approaches and better solutions to problems.

These days we might just as well spend our time talking to brick walls, at least we would be talking to the same 'person' each time

Thanks (1)
to gordo
20th Jan 2018 12:51

I have no doubt in my mind (since the Gordon Brown days) that HMRC are out to maximise tax under all circumstances, unless, of course, you have Mr. Gauke negotiating with the big boys.

Thanks (2)
By wamstax
17th Jan 2018 15:06

This is nothing more than a money grabbing antic that has not been thought through.
Firstly there has been no new legislation BUT this is nothing more than a change of interpretation by the so called HMRC technicians that probably haven’t even undertaken any investigations in their whole career. They are even reportedly getting third parties to train their investigators.
Into the bargain I am now hearing that some officers don’t even know how the pre 2009 penalty legislation was applied and are trying to impute penalties for pre 2009 years way above any that anybody with a proper appraisal of how the legislation and practice has developed would have even contemplated.
Simple answer is do not agree any penalties -not even the existence of these until HMRC are seen to be taking a reasonable line. IT IS FOR HMRC TO PROVE THAT ANY PENALTY EXISTS even before starting to speak about the level.
Recent forum discussions have also revealed that the new breed of investigator doesn’t even know the limit of their powers when trying to go back 9 years for a careless error on a previously Unrepresented taxpayer.
The present unreasonable attacks on the public will only serve to make people more reticent about making voluntary disclosures.
What happens Then in COP9 cases where one of the conditions for no publication is full abatement for helping and telling. All COP9 cases will therefore be published in the future unless HMRC have a rethink or clarify their conditions. Maybe they haven’t thought that one out not having dealt with serious fraud ( or maybe I have missed something - tongue in cheek - but await HMRC clarifying as we know they read these forums).

Thanks (2)
17th Jan 2018 15:10

I see a silver lining in every cloud. I am a nice guy but like any successful business person there is a ruthless side to my character.

When someone deals cynically with me I feel free to let the ruthless side rip. HMRC is probably the single most cynical and incompetent organisation I deal with, so no hesitation in dealing ruthlessly with them and exploiting their numerous failings.

Thanks (1)