Finance Bill

House of Commons

Session 2006 - 07
Internet Publications
Other Bills before Parliament

Finance Bill

Finance Bill
Schedule 24 — Penalties for errors
Part 2 — Amount of penalty
263

Part 2
Amount of penalty
Standard amount
4     (1)
The penalty payable under paragraph 1 is—
(a)
for careless action, 30% of the potential lost revenue,
5
(b)
for deliberate but not concealed action, 70% of the potential lost
revenue, and
(c)
for deliberate and concealed action, 100% of the potential lost
revenue.
      (2)
The penalty payable under paragraph 2 is 30% of the potential lost revenue.
10
      (3)
Paragraphs 5 to 8 define “potential lost revenue”.
Potential lost revenue: normal rule
5     (1)
“The potential lost revenue” in respect of an inaccuracy in a document or a
failure to notify an under-assessment is the additional amount due or
payable in respect of tax as a result of correcting the inaccuracy or
15
assessment.
      (2)
The reference in sub-paragraph (1) to the additional amount due or payable
includes a reference to—
(a)
an amount payable to HMRC having been erroneously paid by way
of repayment of tax, and
20
(b)
an amount which would have been repayable by HMRC had the
inaccuracy or assessment not been corrected.
      (3)
In sub-paragraph (1) “tax” includes national insurance contributions.
      (4)
The following shall be ignored in calculating potential lost revenue under
this paragraph—
25
(a)
group relief, and
(b)
section 419(4) of ICTA (close company: relief for loans);

(but this sub-paragraph does not prevent a penalty being charged in respect
of an inaccurate claim for relief).
Potential lost revenue: multiple errors
30
6     (1)
Where P is liable to a penalty in respect of more than one inaccuracy, and the
calculation of potential lost revenue under paragraph 5 in respect of each
inaccuracy depends on the order in which they are corrected—
(a)
careless inaccuracies shall be taken to be corrected before deliberate
inaccuracies, and
35
(b)
deliberate but not concealed inaccuracies shall be taken to be
corrected before deliberate and concealed inaccuracies.
      (2)
In calculating potential lost revenue where P is liable to a penalty in respect
of one or more understatements in one or more documents relating to a tax
period, account shall be taken of any overstatement in any document given
40
by P which relates to the same tax period.
      (3)
In sub-paragraph (2)—

Finance Bill
Schedule 24 — Penalties for errors
Part 2 — Amount of penalty
264

(a)
“understatement” means an inaccuracy that satisfies Condition 1 of
paragraph 1, and
(b)
“overstatement” means an inaccuracy that does not satisfy that
condition.
      (4)
For the purposes of sub-paragraph (2) overstatements shall be set against
5
understatements in the following order—
(a)
understatements in respect of which P is not liable to a penalty,
(b)
careless understatements,
(c)
deliberate but not concealed understatements, and
(d)
deliberate and concealed understatements.
10
      (5)
In calculating potential lost revenue in respect of a document given by or on
behalf of P no account shall be taken of the fact that a potential loss of
revenue from P is or may be balanced by a potential over-payment by
another person (except to the extent that an enactment requires or permits a
person’s tax liability to be adjusted by reference to P’s).
15
Potential lost revenue: losses
7     (1)
Where an inaccuracy has the result that a loss is wrongly recorded for
purposes of direct tax and the loss has been wholly used to reduce the
amount due or payable in respect of tax, the potential lost revenue is
calculated in accordance with paragraph 5.
20
      (2)
Where an inaccuracy has the result that a loss is wrongly recorded for
purposes of direct tax and the loss has not been wholly used to reduce the
amount due or payable in respect of tax, the potential lost revenue is—
(a)
the potential lost revenue calculated in accordance with paragraph 5
in respect of any part of the loss that has been used to reduce the
25
amount due or payable in respect of tax, plus
(b)
10% of any part that has not.
      (3)
Sub-paragraphs (1) and (2) apply both—
(a)
to a case where no loss would have been recorded but for the
inaccuracy, and
30
(b)
to a case where a loss of a different amount would have been
recorded (but in that case sub-paragraphs (1) and (2) apply only to
the difference between the amount recorded and the true amount).
      (4)
Where an inaccuracy has the effect of creating or increasing an aggregate
loss recorded for a group of companies—
35
(a)
the potential lost revenue shall be calculated in accordance with this
paragraph, and
(b)
in applying paragraph 5 in accordance with sub-paragraphs (1) and
(2) above, group relief may be taken into account (despite paragraph
5(4)(a)).
40
      (5)
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).

Finance Bill
Schedule 24 — Penalties for errors
Part 2 — Amount of penalty
265

Potential lost revenue: delayed tax
8     (1)
Where an inaccuracy resulted in an amount of tax being declared later than
it should have been (“the delayed tax”), the potential lost revenue is—
(a)
5% of the delayed tax for each year of the delay, or
(b)
a percentage of the delayed tax, for each separate period of delay of
5
less than a year, equating to 5% per year.
      (2)
This paragraph does not apply to a case to which paragraph 7 applies.
Reductions for disclosure
9     (1)
A person discloses an inaccuracy or a failure to disclose an under-
assessment by—
10
(a)
telling HMRC about it,
(b)
giving HMRC reasonable help in quantifying the inaccuracy or
under-assessment, and
(c)
allowing HMRC access to records for the purpose of ensuring that
the inaccuracy or under-assessment is fully corrected.
15
      (2)
Disclosure—
(a)
is “unprompted” if made at a time when the person making it has no
reason to believe that HMRC have discovered or are about to
discover the inaccuracy or under-assessment, and
(b)
otherwise, is “prompted”.
20
      (3)
In relation to disclosure “quality” includes timing, nature and extent.
10    (1)
Where HMRC think that a person who would otherwise be liable to a 30%
penalty has made an unprompted disclosure, HMRC shall reduce the 30%
to a percentage (which may be 0%) which HMRC think reflects the quality
of the disclosure.
25
      (2)
Where HMRC think that a person who would otherwise be liable to a 30%
penalty has made a prompted disclosure, HMRC shall reduce the 30% to a
percentage, not below 15%, which HMRC think reflects the quality of the
disclosure.
      (3)
Where HMRC think that a person who would otherwise be liable to a 70%
30
penalty has made an unprompted disclosure, HMRC shall reduce the 70%
to a percentage, not below 20%, which HMRC think reflects the quality of
the disclosure.
      (4)
Where HMRC think that a person who would otherwise be liable to a 70%
penalty has made a prompted disclosure, HMRC shall reduce the 70% to a
35
percentage, not below 35%, which HMRC think reflects the quality of the
disclosure.
      (5)
Where HMRC think that a person who would otherwise be liable to a 100%
penalty has made an unprompted disclosure, HMRC shall reduce the 100%
to a percentage, not below 30%, which HMRC think reflects the quality of
40
the disclosure.
      (6)
Where HMRC think that a person who would otherwise be liable to a 100%
penalty has made a prompted disclosure, HMRC shall reduce the 100% to a
percentage, not below 50%, which HMRC think reflects the quality of the
disclosure.
45

Finance Bill
Schedule 24 — Penalties for errors
Part 3 — Procedure
266

Special reduction
11    (1)
If they think it right because of special circumstances, HMRC may reduce a
penalty under paragraph 1 or 2.
      (2)
In sub-paragraph (1) “special circumstances” does not include—
(a)
ability to pay, or
5
(b)
the fact that a potential loss of revenue from one taxpayer is balanced
by a potential over-payment by another.
      (3)
In sub-paragraph (1) the reference to reducing a penalty includes a reference
to—
(a)
staying a penalty, and
10
(b)
agreeing a compromise in relation to proceedings for a penalty.
Interaction with other penalties
12    (1)
The final entry in the Table in paragraph 1 excludes a document in respect
of which a penalty is payable under section 98 of TMA 1970 (special returns).
      (2)
The amount of a penalty for which P is liable under paragraph 1 or 2 in
15
respect of a document relating to a tax period shall be reduced by the
amount of any other penalty which P has incurred and the amount of which
is determined by reference to P’s tax liability for that period.
      (3)
In the application of section 97A of TMA 1970 (multiple penalties) no
account shall be taken of a penalty under paragraph 1 or 2.
20
Part 3
Procedure
Assessment
13    (1)
Where P becomes liable for a penalty under paragraph 1 or 2 HMRC shall—
(a)
assess the penalty,
25
(b)
notify P, and
(c)
state in the notice a tax period in respect of which the penalty is
assessed.
      (2)
An assessment—
(a)
shall be treated for procedural purposes in the same way as an
30
assessment to tax (except in respect of a matter expressly provided
for by this Act),
(b)
may be enforced as if it were an assessment to tax, and
(c)
may be combined with an assessment to tax.
      (3)
An assessment of a penalty under paragraph 1 must be made within the
35
period of 12 months beginning with—
(a)
the end of the appeal period for the decision correcting the
inaccuracy, or
(b)
if there is no assessment within paragraph (a), the date on which the
inaccuracy is corrected.
40

Finance Bill
Schedule 24 — Penalties for errors
Part 3 — Procedure
267

      (4)
An assessment of a penalty under paragraph 2 must be made within the
period of 12 months beginning with the end of the appeal period for the
assessment of tax which corrected the understatement.
      (5)
For the purpose of sub-paragraphs (3) and (4) a reference to an appeal period
is a reference to the period during which—
5
(a)
an appeal could be brought, or
(b)
an appeal that has been brought has not been determined or
withdrawn.
      (6)
Subject to sub-paragraphs (3) and (4), a supplementary assessment may be
made in respect of a penalty if HMRC think that an earlier assessment
10
operated by reference to an underestimate of potential lost revenue.
Suspension
14    (1)
HMRC may suspend all or part of a penalty for a careless inaccuracy under
paragraph 1 by notice in writing to P.
      (2)
A notice must specify—
15
(a)
what part of the penalty is to be suspended,
(b)
a period of suspension not exceeding two years, and
(c)
conditions of suspension to be complied with by P.
      (3)
HMRC may suspend all or part of a penalty only if they think that
compliance with a condition of suspension would help P to avoid becoming
20
liable to further penalties under paragraph 1 for careless inaccuracy.
      (4)
A condition of suspension may specify—
(a)
action to be taken, and
(b)
a period within which it must be taken.
      (5)
On the expiry of the period of suspension—
25
(a)
if P satisfies HMRC that the conditions of suspension have been
complied with, the suspended penalty or part is cancelled, and
(b)
otherwise, the suspended penalty or part becomes payable.
      (6)
If, during the period of suspension of all or part of a penalty under
paragraph 1, P becomes liable for another penalty under that paragraph, the
30
suspended penalty or part becomes payable.
Appeal
15    (1)
P may appeal against a decision of HMRC that a penalty is payable by P.
      (2)
P may appeal against a decision of HMRC as to the amount of a penalty
payable by P.
35
      (3)
P may appeal against a decision of HMRC not to suspend a penalty payable
by P.
      (4)
P may appeal against a decision of HMRC setting conditions of suspension
of a penalty payable by P.
16
An appeal may be brought to—
40
(a)
the General Commissioners, in so far as the penalty relates to direct
tax, or

Finance Bill
Schedule 24 — Penalties for errors
Part 4 — Miscellaneous
268

(b)
a VAT and duties tribunal, in so far as the penalty relates to VAT.
17    (1)
On an appeal under paragraph 15(1) the appellate tribunal may affirm or
cancel HMRC’s decision.
      (2)
On an appeal under paragraph 15(2) the appellate tribunal may—
(a)
affirm HMRC’s decision, or
5
(b)
substitute for HMRC’s decision another decision that HMRC had
power to make.
      (3)
If the appellate tribunal substitutes its decision for HMRC’s, the appellate
tribunal may rely on paragraph 11—
(a)
to the same extent as HMRC (which may mean applying the same
10
percentage reduction as HMRC to a different starting point), or
(b)
to a different extent, but only if the appellate tribunal thinks that
HMRC’s decision in respect of the application of paragraph 11 was
flawed.
      (4)
On an appeal under paragraph 15(3)—
15
(a)
the appellate tribunal may order HMRC to suspend the penalty only
if it thinks that HMRC’s decision not to suspend was flawed, and
(b)
if the appellate tribunal orders HMRC to suspend the penalty—
(i)
P may appeal to the appellate tribunal against a provision of
the notice of suspension, and
20
(ii)
the appellate tribunal may order HMRC to amend the notice.
      (5)
On an appeal under paragraph 15(4) the appellate tribunal—
(a)
may affirm the conditions of suspension, or
(b)
may vary the conditions of suspension, but only if the appellate
tribunal thinks that HMRC’s decision in respect of the conditions
25
was flawed.
      (6)
In sub-paragraphs (3)(b), (4)(a) and (5)(b) “flawed” means flawed when
considered in the light of the principles applicable in proceedings for judicial
review.
      (7)
Paragraph 14 (see in particular paragraph 14(3)) is subject to the possibility
30
of an order under this paragraph.
Part 4
Miscellaneous
Agency
18    (1)
P is liable under paragraph 1(1)(a) where a document which contains a
35
careless inaccuracy (within the meaning of paragraph 3) is given to HMRC
on P’s behalf.
      (2)
In paragraph 2(1)(b) and (2)(a) a reference to P includes a reference to a
person who acts on P’s behalf in relation to tax.
      (3)
Despite sub-paragraphs (1) and (2), P is not liable to a penalty in respect of
40
anything done or omitted by P’s agent where P satisfies HMRC that P took
reasonable care to avoid inaccuracy (in relation to paragraph 1) or
unreasonable failure (in relation to paragraph 2).

Finance Bill
Schedule 24 — Penalties for errors
Part 4 — Miscellaneous
269

      (4)
In paragraph 3(1)(a) (whether in its application to a document given by P or,
by virtue of sub-paragraph (1) above, in its application to a document given
on P’s behalf) a reference to P includes a reference to a person who acts on
P’s behalf in relation to tax.
      (5)
In paragraph 3(2) a reference to P includes a reference to a person who acts
5
on P’s behalf in relation to tax.
Companies: officers’ liability
19    (1)
Where a penalty under paragraph 1 is payable by a company for a deliberate
inaccuracy which HMRC think was attributable to an officer of the
company—
10
(a)
the officer as well as the company shall be liable to pay the penalty,
and
(b)
HMRC may pursue the officer for such portion of the penalty (which
may be 100%) as they may specify by written notice to the officer.
      (2)
Sub-paragraph (1) does not allow HMRC to recover more than 100% of a
15
penalty.
      (3)
In the application of sub-paragraph (1) to a body corporate “officer”
means—
(a)
a director (including a shadow director within the meaning of
section 251 of the Companies Act 2006 (c. 46)), or
20
(b)
a secretary.
      (4)
In the application of sub-paragraph (1) in any other case “officer” means—
(a)
a director,
(b)
a manager,
(c)
a secretary, and
25
(d)
any other person managing or purporting to manage any of the
company’s affairs.
      (5)
A reference to P in this Schedule (including paragraph 15) includes a
reference to an officer of the company who is liable for a portion of the
penalty in accordance with this paragraph.
30
Partnerships
20    (1)
This paragraph applies where P is liable to a penalty under paragraph 1 for
an inaccuracy in or in connection with a partnership return.
      (2)
Where the inaccuracy affects the amount of tax due or payable by a partner
of P, the partner is also liable to a penalty (“a partner’s penalty”).
35
      (3)
Paragraphs 4 to 13 and 19 shall apply in relation to a partner’s penalty (for
which purpose a reference to P shall be taken as a reference to the partner).
      (4)
Potential lost revenue shall be calculated separately for the purpose of P’s
penalty and any partner’s penalty, by reference to the proportions of any tax
liability that would be borne by each partner.
40
      (5)
Paragraph 14 shall apply jointly to P’s penalty and any partner’s penalties.