Tax penalties and reasonable excuses.
Practitioners are not under a duty to make enquiries to identify irregularities which are unrelated to the work they have been engaged by clients to undertake.
Notwithstanding this, members may give clients information about how the tax system works so that they can consider whether their record keeping arrangements and processes are adequate to produce accurate returns.
Deadlines
A tax penalty can apply when a person fails to notify HMRC, by the appropriate deadline, that they are chargeable to tax. Examples of obligations to notify HMRC and the relevant deadlines include those in the table below:
| Business exceeds the VAT registration threshold | 30 days |
| Change in the VAT supplies | 30 days |
| Company first becomes chargeable to corporation tax | 3 months from when the
company’s accounting period began |
| Person becomes self-employed – and due to pay Class 2 National Insurance | 3 months from the end of the calendar month in which self-employment started |
| Profits from self-employment first chargeable to tax | 6 months from the end of the relevant tax year |
| Investment income reaches a level that makes it
chargeable to tax |
6 months from the end of the relevant tax year |
Penalties are applied to ‘potential lost revenue’. This is the additional amount of tax due or payable as a result of correcting the error.
Penalty range
The rate of penalty is determined according to the taxpayer’s underlying behaviour, as appraised at various stages between the time of the discovery and its disclosure to HMRC.
| Type of behaviour | Unprompted or prompted
disclosure |
Penalty range |
| Non- deliberate | Unprompted – within 12 months of tax being due | 0% to 30% |
| Unprompted – 12 months or more after tax was due | 10% to 30% | |
| Prompted – within 12 months of tax being due | 10% to 30% | |
| Prompted – 12 months or more after tax was due | 20% to 30% | |
| Deliberate | Unprompted | 20% to 70% |
| Prompted | 35% to 70% | |
| Deliberate and concealed | Unprompted | 30% to 100% |
| Prompted | 50% to 100% |
Mitigation
The penalty can be reduced depending on the level of assistance and the quality of disclosure given to HMRC. For example:
- telling gives a reduction up to 30%
- helping gives a reduction to 40%
- giving access to records gives a reduction up to 30%.
Reasonable excuse
HMRC will not charge a penalty for a failure to notify if:
- there is a reasonable excuse for the failure
- it was not deliberate
- the taxpayer told HMRC without unreasonable delay after the reasonable excuse ended.
A ‘reasonable excuse’ is normally an unexpected or unusual event that is either unforeseeable or beyond an individual’s control. What is or is not a reasonable excuse will depend upon the individual’s particular abilities and circumstances.
ACCA has provided guidance on reasonable excuse – tax returns while HMRC has produced its own guidance as to what comprises a ‘reasonable excuse’
Article extracted from ACCA “In Practice” Newsletter