Understanding HMRC’s Peanalty Factsheet

The HMRC factsheet, “Penalties for inaccuracies in returns and documents” is issued when HMRC believes a penalty is likely to be due. The document is full of crucial information – most of which is buried in the text. Here’s a typical Q & A which is taken from the new ebook, Penalties for inaccuracies in returns and documents DECODED.

Penalties play a very important part in any tax investigation, in some cases they can double the final amount HMRC demands. This is a really important document, it sets out your rights and even tells you how you can avoid paying a penalty all together – but this information is buried.

So, what is going on?
Around 2005 our government decided they needed to get more cash in from HMRC. There were two broad approaches; the first was to sack large numbers of HMRC staff and the second was to change the tax laws to give the remaining staff more power.

And just how does this affect me?
The investigator dealing with your case is likely to be overworked and under–skilled; tax is complex and investigators are rarely in full command of the law. The 2007 Finance Act gave HMRC increased powers across the board and significantly increased penalties. Before 2007 penalties had no LOWER base limit, taxpayers with good advisors regularly negotiated penalties to low levels – sometimes as low as 20 percent for blatant fraud. From 2007 a series of baselines were introduced below which it was impossible to haggle. These set minimum amounts that made the penalty system much tougher.

Why have I been sent this factsheet?
The Penalties for inaccuracies in returns and documents factsheet is issued in a tax investigation at the point when HMRC feel that there is a probability of a fine being paid.

Wait, you say ‘tax investigation’ but they are saying ‘compliance check’, what’s with that?
Compliance check, enquiry or tax investigation – it’s all much the same thing. The bottom line is that HMRC have smelled a rat, they’ve checked it out and now they think that you have underpaid tax, that’s why you’ve got this factsheet.

I’ve read the factsheet, but I don’t really understand what it’s saying, why is that?
Once HMRC has decided penalties are probably due they are legally required to give you certain facts, however HMRC doesn’t want to help you, so they make the information as opaque as possible.

So what is a penalty?
It’s a fine for underpaying tax. The amount is a percentage of your underpayment. The percentage will depend on how badly HMRC feel you have behaved; if they feel you went out of your way to hide your income it will be high; if you can show them you made an innocent mistake it can be reduced to zero.

Can I get out of paying this penalty?
Yes, you can either reduce the penalty or have it completely removed depending on your conduct with HMRC and why you underpaid tax. You need to prove that you acted in a ‘reasonable’ way. It’s worth noting that if your tax return was wrong but you didn’t underpay tax there will be no penalty as the penalty is a percentage of tax owed.

I don’t have much time, what are the five most important things I need to know about penalties?

1. A penalty is a fine for underpaying tax.
2. It’s a percentage of the tax and National Insurance HMRC believes you have underpaid. If the penalty level is set at 50 percent and you end up owing HMRC £1,000 they will want £1,500 from you – plus interest.
3. The penalty system will put you into one of two broad camps; the first is ‘Innocent’. In this camp you didn’t really know what you were doing. It contains people who took reasonable care and also those who made innocent mistakes. This is the camp you want to be in because the penalties are far less harsh and can even be zero.
   The second half camp is ‘Guilty’ and HMRC thinks of these people as those who deliberately set out to underpay tax, they knew what they were doing and hid income and perhaps even fabricated paperwork. This camp is treated much more harshly. You don’t want to be in this group if you can possibly help it. If anybody at HMRC ever uses words like ‘guilty’ or ‘deliberate’ alarm bells should sound.
4. If you can prove you belong to ‘Camp Innocent’ it is possible that the penalty can be suspended. This can mean that you pay no penalty at all, providing you meet the conditions of the suspension.
5. If HMRC have found significant errors – these could be for relatively small amounts of money – they can open up earlier years for examination. It starts at four years, then if they can prove your errors are careless HMRC can go back six years and if they can prove the errors are deliberate they can go back twenty years.

If you’ve been running a business and you have failed to tell HMRC about income and gains in good time it’s called a ‘failure to notify chargeability’ – and that means they can go back twenty years.

Convincing HMRC that you have made an innocent mistake rather than deliberately setting out to underpay tax can have a huge impact on the final figure you are asked to pay.

Penalties for inaccuracies in returns and documents DECODED costs just £10. You can get more information and buy the ebook here.

If you don’t have the factsheet to hand you can download it here: https://www.gov.uk/government/publications/compliance-checks-penalties-for-inaccuracies-in-returns-or-documents-ccfs7a.