Introduction
In the previous chapters, we have studied the comprehensive computation of
income tax and capital gains tax liabilities.
In this chapter, we look at the overall system for the administration of tax. We
then see how individuals and partnerships must ‘self assess’ their liability to
income tax and capital gains tax. We deal with self assessment for companies
later in this Text.
In the next chapter, we will commence our study of inheritance tax.
Study guide
| Intellectual level | ||
| 2 | Chargeable gains and capital gains tax liabilities in situations involving further overseas aspects and in relation to closely related persons and trusts together with the application of additional exemptions and reliefs | |
| (e) | Gains and losses on the disposal of movable and immovable property: | 3 |
| (v) | Determine when capital gains tax can be paid by instalments and evaluate when this would be advantageous to taxpayers | |
| 6 | Value added tax, tax administration and the UK tax system: | |
| (b) | The contents of the Paper F6 study guide for the UK tax system and its administration under headings: | 2 |
| | A3 The systems for self assessment and the making of returns | |
| | A4 The time limits for the submission of information, claims and payment of tax, including payments on account | |
| | A5 The procedures relating to compliance checks, appeals and disputes | |
| | A6 Penalties for non-compliance | |
| (i) | Advise on the increased penalties which apply in relation to offshore matters | 2 |
Exam guide
In any tax advice question, you must consider the administrative requirements and time limits. You must know the taxpayer’s responsibilities for making returns and paying tax, and the rules that HMRC can use to enforce compliance.
This chapter is mainly a revision of material studied in Paper F6. The new topics are payment of capital gains tax by instalments, tax offenders and increased penalties which apply in relation to offshore matters.
The only change for 2015/16 in the rules which you studied at F6 in 2014/15 is the collection of Class 2 NICs through the self assessment system.
1 The administration of taxation
FAST FORWARD
Taxes are administered by Her Majesty’s Revenue and Customs.
The Treasury formally imposes and collects taxation. The management of the Treasury is the responsibility of the Chancellor of the Exchequer. The administrative function for the collection of tax is undertaken by Her Majesty’s Revenue and Customs (HMRC). Rules on these administrative matters are contained in the Taxes Management Act 1970 (TMA 1970).
HMRC consists of the Commissioners for Her Majesty’s Revenue and Customs and staff known as Officers of Revenue and Customs who are responsible for supervising the self-assessment system and agreeing tax liabilities.
Tax appeals are heard by the Tax Tribunal which is made up of two tiers:
- First Tier Tribunal, and
- Upper Tribunal
The First Tier Tribunal deals with most cases other than complex cases. The Upper Tribunal deals with complex cases which either involve an important issue of tax law or a large financial sum. The Upper Tribunal also hears appeals against decisions of the First Tier Tribunal. We look at the appeals system in more detail later in this chapter.
Many taxpayers arrange for their accountants to prepare and submit their tax returns. The taxpayer remains responsible for submitting the return and for paying the tax; the accountant acts as the taxpayer’s agent.
2 Notification of liability to income tax and CGT 6/12
FAST FORWARD
Individuals who do not receive a tax return or who have a new source of income or gains must notify their chargeability to income tax or CGT.
Individuals who have not received a notice to file a return, or who have a new source of income or gains in the tax year, are required to give notice of chargeability to HMRC within six months from the end of the year ie by 5 October 2016 for 2015/16.
A person who has no chargeable gains and who is not liable to higher rate tax does not have to give notice of chargeability if all his income:
- Is taken into account under PAYE
- Is from a source of income not subject to tax under a self-assessment
- Has had (or is treated as having had) income tax deducted at source, or (d) Is a UK dividend
A penalty is charged for late notification (see later in this Chapter).
3 Tax returns and keeping records
| Tax returns must usually be filed by 31 October (paper) or 31 January (electronic) following the end of the tax year. |
FAST FORWARD
3.1 Tax returns
The tax return comprises a basic six page return form, together with supplementary pages for particular sources of income. Taxpayers are sent a return and a number of supplementary pages depending on their known sources of income, together with a Tax Return Guide and various notes relating to the supplementary pages. The taxpayer must sign a declaration that the information given on the tax return and any supplementary pages is correct and complete to the best of the taxpayer’s knowledge and belief and a statement that the taxpayer understands that he may have to pay financial penalties and face prosecution if he gives false information.
Taxpayers with simple tax returns may be asked to complete a short four page tax return. If a return for the previous year was filed electronically the taxpayer may be sent a notice to file a return, rather than the official HMRC form.
Partnerships must file a separate return which includes a ‘Partnership Statement’ showing the firm’s profits, losses, proceeds from the sale of assets, tax suffered, tax credits and the division of all these amounts between partners. A partnership return must include a declaration of the name and tax reference of each partner, as well as the usual declaration by the partner nominated to make the return that it is correct and complete to the best of the signatory’s knowledge and belief. There is a warning on the form that if false information is given or any of the partnership’s income or gains is concealed, the partners may be liable to financial penalties and/or HMRC may prosecute them. Each partner must then include his share of partnership profits on his personal tax return.
| The latest filing date for a personal tax return for a tax year (Year 1) is:
• 31 October in the next tax year (Year 2), for a non-electronic return (eg a paper return). • 31 January in Year 2, for an electronic return (eg made via the Internet). |
3.2 Time limit for submission of tax returns Key term
There are two exceptions to this general rule.
The first exception applies if the notice to file a tax return is issued by HMRC to the taxpayer after 31 July in Year 2, but on or before 31 October in Year 2. In this case, the latest filing date is:
the end of 3 months following the notice, for a paper return 31 January in Year 2, for an electronic return.
The second exception applies if the notice to file the tax return is issued to the taxpayer after 31 October in Year 2. In this case, the latest filing date is the end of 3 months following the notice.
Advise each of the following clients of the latest filing date for her personal tax return for 2015/16 if the return is:
(a) paper; or (b) electronic.
Norma Notice to file tax return issued by HMRC on 6 April 2016
Melanie Notice to file tax return issued by HMRC on 10 August 2016
Olga Notice to file tax return issued by HMRC on 12 December 2016
| Paper | Electronic | |
| Norma | 31 October 2016 | 31 January 2017 |
| Melanie | 9 November 2016 | 31 January 2017 |
| Olga | 11 March 2017 | 11 March 2017 |
A partnership return may be filed as a paper return or an electronic return. The general rule and the exceptions to the general rule for personal returns apply also to partnership returns.
3.3 Standard accounting information
The tax return requires trading results to be presented in a standard format. Although there is no requirement to submit accounts with the return, accounts may be filed. If accounts accompany the return, HMRC’s power to raise a discovery assessment (see below) is restricted.
Only ‘three line’ accounts (ie income less expenses equals profit) need be included on the tax return of businesses with a turnover (or gross rents from property) of less than the threshold for VAT registration (£82,000). This is not as helpful as it might appear, as underlying records must still be kept for tax purposes (disallowable items etc) when producing three line accounts.
Large businesses with a turnover of at least £5 million which have used figures rounded to the nearest £1,000 in producing their published accounts can compute their profits to the nearest £1,000 for tax purposes.
3.4 Keeping of records
All taxpayers must retain all records required to enable them to make and deliver a correct tax return.
Records must be retained until the later of:
(a) (i) 5 years after the 31 January following the tax year where the taxpayer is in business (as a sole trader or partner or letting property). Note that this applies to all of the records, not only the business records, or
(ii) 1 year after the 31 January following the tax year otherwise, or (b) Provided notice to deliver a return is given before the date in (a):
- The time after which a compliance check enquiry by HMRC into the return can no longer be commenced, or
- The date any such a compliance check enquiry has been completed.
HMRC can specify a shorter time limit for keeping records where the records are bulky and the information they contain can be provided in another way.
Where a person receives a notice to deliver a tax return after the normal record keeping period has expired, he must keep all records in his possession at that time until no compliance check enquiry can be started in respect of the return or until such a compliance check enquiry has been completed.
Taxpayers can keep ‘information’, rather than ‘records’, but must show that they have prepared a complete and correct tax return. The information must also be able to be provided in a legible form on request. Records can be kept in electronic format.
HMRC can inspect ‘in-year’ records, ie before a return is submitted, if they believe it is reasonably required to check a tax position.
4 Self-assessment and claims
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FAST FORWARD
If a paper return is filed the taxpayer can ask HMRC to compute the tax due. Electronic returns have tax calculated automatically.
4.1 Self-assessment
Key term A self-assessment is a calculation of the amount of taxable income and gains after deducting reliefs and allowances, and a calculation of income tax and CGT payable after taking into account tax deducted at source and tax credits on dividends.
If the taxpayer is filing a paper return (other than a Short Tax Return), he may make the tax calculation on his return or ask HMRC to do so on his behalf.
If the taxpayer wishes HMRC to make the calculation for Year 1, a paper return must be filed:
- on or before 31 October in Year 2 or,
- if the notice to file the tax return is issued after 31 August in Year 2, within 2 months of the notice.
If the taxpayer is filing an electronic return, the calculation of tax liability is made automatically when the return is made online.
4.2 Amending the self-assessment
The taxpayer may amend his return (including the tax calculation) for Year 1 within twelve months after the filing date. For this purpose the filing date means: 31 January of Year 2; or
where the notice to file a return was issued after 31 October in Year 2, the last day of the three month period starting with the issue.
A return may be amended by the taxpayer at a time when a compliance check enquiry is in progress into the return. The amendment does not restrict the scope of a compliance check enquiry into the return but may be taken into account in that enquiry. If the amendment made during a compliance check enquiry is the amount of tax payable, the amendment does not take effect while the compliance check enquiry is in progress.
A return may be amended by HMRC to correct any obvious error or omission in the return (such as errors of principle and arithmetical mistakes) or anything else that an officer has reason to believe is incorrect in the light of information available. The correction must usually be made within nine months after the day on which the return was actually filed. The taxpayer can object to the correction but must do so within 30 days of receiving notice of it.
Similar rules apply to the amendment and correction of partnership returns.
4.3 Claims
All claims and elections which can be made in a tax return must be made in this manner if a return has been issued. A claim for any relief, allowance or repayment of tax must be quantified at the time it is made.
In general, the time limit for making a claim is four years from the end of tax year. Where different time limits apply these have been mentioned throughout this Text.
4.4 Recovery of overpaid tax
If a taxpayer discovers that he has overpaid tax, for example because he has made an error in his tax return, he can make a claim to have the overpaid tax repaid to him. The claim must be made within four years of the end of the tax year to which the overpayment relates.
5 Payment of income tax and capital gains tax 12/12, 12/14
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5.1 Payments on account and final payment
5.1.1 Introduction
The self-assessment system may result in the taxpayer making three payments of income tax and Class 4 NICs.
| Date | Payment |
| 31 January in the tax year | 1st payment on account |
| 31 July after the tax year | 2nd payment on account |
| 31 January after the tax year | Final payment to settle the remaining liability |
HMRC issues ‘Statements of Account’ which include payslips, but there is no statutory obligation for it to do so and the onus is on the taxpayer to pay the correct amount of tax by the due date.
5.1.2 Payments on account
Key term Payments on account are usually required where the income tax and Class 4 NICs due in the previous year exceeded the amount of income tax deducted at source; this excess is known as ‘the relevant amount’. Income tax deducted at source includes tax suffered, PAYE deductions and tax credits on dividends.
The payments on account are each equal to 50% of the relevant amount for the previous year.
Exam focus Payments on account of CGT are never required. point
Sue is a self employed writer who paid tax for 2015/16 as follows:
£
Total amount of income tax charged 9,200 This included: Tax deducted on savings income 3,200
She also paid: Class 4 NIC 1,900
How much are the payments on account for income tax and Class 4 NIC for 2016/17 and by what dates are they due?
£
Income tax:
Total income tax charged for 2015/16 9,200
Less tax deducted for 2015/16 (3,200)
6,000
Class 4 NIC 1,900
‘Relevant amount’ 7,900
| Payments on account for 2016/17: | |
| 31 January 2017 £7,900 50% | 3,950 |
| 31 July 2017 £7,900 50% | 3,950 |
Payments on account are not required if the relevant amount falls below a de minimis limit of £1,000. Also, payments on account are not required from taxpayers who paid 80% or more of their tax liability for the previous year through PAYE or other deduction at source arrangements.
If the previous year’s liability increases following an amendment to a self-assessment, or the raising of a discovery assessment, an adjustment is made to the payments on account due.
5.1.3 Reducing payments on account
Payments on account are normally fixed by reference to the previous year’s tax liability but if a taxpayer expects his liability to be lower than this he may claim to reduce his payments on account to:
(a) A stated amount, or (b) Nil.
The claim must state the reason why he believes his tax liability will be lower, or nil.
If the taxpayer’s eventual liability is higher than he estimated he will have reduced the payments on account too far. Although the payments on account will not be adjusted, the taxpayer will suffer an interest charge on late payment.
A penalty of the difference between the reduced payment on account and the correct payment on account may be levied if the reduction was claimed fraudulently or negligently.
5.1.4 Balancing payment
The balance of any income tax and Class 4 NICs together with Class 2 NICs and CGT due for a year, is normally payable on or before the 31 January following the year.
Giles made payments on account for 2015/16 of £6,500 each on 31 January 2016 and 31 July 2016, based on his 2014/15 liability. He then calculates his total income tax and Class 4 NIC liability for 2015/16 at £18,000 of which £2,750 was deducted at source. In addition he calculated that his CGT liability for disposals in 2015/16 is £5,120 and his Class 2 NIC liability is £146.
What is the final payment due for 2015/16?
Income tax and Class 4 NIC: £18,000 – £2,750 – £6,500 – £6,500 = £2,250. CGT = £5,120. Class 2 NIC = £146
Final payment due on 31 January 2017 for 2015/16 £2,250 + £5,120 + £146 = £7,516
In one case the due date for the final payment is later than 31 January following the end of the year. If a taxpayer has notified chargeability by 5 October but the notice to file a tax return is not issued before 31 October, then the due date for the payment is three months after the issue of the notice.
Tax charged in an amended self-assessment is usually payable on the later of:
(a) The normal due date, generally 31 January following the end of the tax year, and (b) The day following 30 days after the making of the revised self-assessment.
Tax charged on a discovery assessment (see below) is due thirty days after the issue of the assessment.
5.2 Penalty for late payment of tax
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FAST FORWARD
A penalty is chargeable where tax is paid after the due date based on the amount of unpaid tax. Up to 15% of that amount is payable where the tax is more than 12 months late.
A penalty is chargeable where tax is paid after the penalty date. The penalty date is 30 days after the due date for the tax. Therefore no penalty arises if the tax is paid within 30 days of the due date.
The penalty chargeable is:
| Date of payment | Penalty |
| Not more than 5 months after the penalty date | 5% of tax which is unpaid at the penalty date. |
| More than 5 months after the penalty date but not more than 11 months after the penalty date | 5% of tax which is unpaid at the end of the 5 month period. This is in addition to the 5% penalty above. |
| More than 11 months after the penalty date | 5% of tax which is unpaid at the end of the 11 month period. This is in addition to the two 5% penalties above. |
Penalties for late payment of tax apply to:
- Balancing payments of income tax and Class 4 NICs and any CGT under self-assessment or a determination
- Tax due on the amendment of a self-assessment
- Tax due on a discovery assessment
Penalties for late payment do not apply to late payments on account.
5.3 Interest on late paid tax
Interest is chargeable on late payment of both payments on account and balancing payments. Late payment interest is charged from the due date for payment until the date payment is made.
For the purpose of P6 (UK) exams in September 2016, December 2016 and March 2017, the assumed rate of interest on underpaid tax is 3.0% and the assumed rate of interest on overpaid tax is 0.5%.
| You will be given the rate of interest to use in the exam. You should work to the nearest month. |
Exam focus point
Interest is charged from 31 January following the tax year (or the normal due date for the balancing payment, in the rare event that this is later), even if this is before the due date for payment on:
- Tax payable following an amendment to a self-assessment
- Tax payable in a discovery assessment, and
- Tax postponed under an appeal which becomes payable.
Since a determination (see below) is treated as if it were a self-assessment, interest runs from 31 January following the tax year.
If a taxpayer claims to reduce his payments on account and there is still a final payment to be made, interest is normally charged on the payments on account as if each of those payments had been the lower of:
- the reduced amount, plus 50% of the final income tax liability; and
- the amount which would have been payable had no claim for reduction been made.
Herbert’s payments on account for 2015/16 based on his income tax liability for 2014/15 were £4,500 each. However when he submitted his 2014/15 income tax return in January 2016 he made a claim to reduce the payments on account for 2015/16 to £3,500 each. The first payment on account was made on 1 February 2016, and the second on 1 November 2016.
Herbert filed his 2015/16 tax return in December 2016. The return showed that his tax liabilities for 2015/16 (before deducting payments on account) were income tax and Class 4 NIC: £10,000, capital gains tax: £2,500. Herbert paid the balance of tax due of £5,500 on 1 April 2017.
For what periods (to the nearest month) and in respect of what amounts will Herbert be charged interest?
Herbert made an excessive claim to reduce his payments on account, and will therefore be charged interest on the reduction. The payments on account should have been £4,500 each based on the original 2014/15 liability (not £5,000 each based on the 2015/16 liability). Interest will be charged as follows: (a) First payment on account
- On £3,500 – nil as paid on time
- On £1,000 from due date of 31 January 2016 to payment date, 1 April 2017 (14 months)
- Second payment on account
- On £3,500 from due date of 31 July 2016 to payment date, 1 November 2016 (3 months) (ii) On £1,000 from due date of 31 July 2016 to payment date, 1 April 2017 (8 months)
- Balancing payment
- On £3,500 from due date of 31 January 2017 to payment date, 1 April 2017 (2 months)
Where interest has been charged on late payments on account but the final balancing settlement for the year produces a repayment, all or part of the original interest is repaid.
5.4 Repayment of tax and repayment supplement
Tax is repaid when claimed unless a greater payment of tax is due in the following 30 days, in which case it is set-off against that payment.
Interest is paid on overpayments of:
- Payments on account
- Final payments of income tax and Class 4 NICs, and CGT, including tax deducted at source or tax credits on dividends, and (c) Penalties.
Repayment supplement runs from the original date of payment (even if this was prior to the due date), until the day before the date the repayment is made. Income tax deducted at source and tax credits are treated as if they were paid on the 31 January following the tax year concerned.
Repayment supplement paid to individuals is tax free.
5.5 Payment of CGT 12/12
FAST FORWARD
Capital gains tax is usually due on 31 January following the end of the tax year. However, CGT may be paid in instalments where consideration is received over a period in excess of 18 months or in certain circumstances where the disposal is a gift.
5.5.1 General rule
Capital gains tax is usually payable in one payment on 31 January following the end of the tax year.
Exam focus Payments on account of CGT are never required.
point
5.5.2 Payment by instalments: extended receipt of consideration
CGT may be paid in instalments where there is a disposal resulting in a gain but the consideration for the disposal is received over a period in excess of 18 months.
To avoid hardship to the taxpayer, the CGT due may be paid by instalments over the period that consideration is received up to a maximum of eight years. The amount of the instalments must be agreed with HMRC. For example, the instalments may be related to the amount of consideration received at various times during the period.
Interest is only paid on late paid instalments, not on the outstanding balance. This instalment option is therefore very attractive to the taxpayer who can agree with HMRC to pay the outstanding CGT when the consideration is received without increasing the overall liability.
5.5.3 Payment by instalments: gifts of land and shares not attracting gift relief
CGT may also be paid by instalments where the disposal is a gift but gift relief is not wholly available (or, in some circumstances, has been clawed back). It is not possible to pay CGT by instalments under these rules if gift relief was available but was not claimed nor if there is a disposal at an undervalue.
The gifted asset must be one of the following:
- Land or an interest in land;
- Any shares or securities which gave the donor control of the company (quoted or unquoted) immediately before the gift
- Shares in an unquoted company.
An election for instalments must be made by the taxpayer to HMRC before the CGT becomes payable. The instalments will be paid as ten equal annual instalments starting on the normal due date. The outstanding balance will attract interest. Interest will also be due on late paid instalments.
The outstanding balance of CGT (plus interest to the date of payment) may be paid at any time. The outstanding CGT becomes immediately payable if the disposal was to a connected person and the gifted asset is sold (whether or not by the original donee).
Generally, this instalment option is not particularly advantageous for taxpayers because interest runs on the unpaid balance.
6 HMRC powers
6.1 Compliance check enquiries
FAST FORWARD
A compliance check enquiry into a return, claim or election can be started by an officer of HMRC within a limited period.
6.1.1 Starting a compliance check enquiry
HM Revenue and Customs has powers to make compliance check enquiries into returns, claims or elections which have already been submitted.
Some returns, claims or elections are selected for a compliance check enquiry at random, others for a particular reason, for example, if HM Revenue and Customs believes that there has been an underpayment of tax due to the taxpayer’s failure to comply with tax legislation.
An officer of HM Revenue and Customs has a limited period within which to commence a compliance check enquiry on a return or amendment. The officer must give written notice of his intention by:
- The first anniversary of the actual filing date, if the return was delivered on or before the due filing date, or
- The quarter day following the first anniversary of the actual filing date, if the return is filed after the due filing date. The quarter days are 31 January, 30 April, 31 July and 31 October.
If the taxpayer amends the return after the due filing date, the compliance check enquiry ‘window’ extends to the quarter day following the first anniversary of the date the amendment was filed. Where the compliance check enquiry was not started within the limit which would have applied had no amendment been filed, the enquiry is restricted to matters contained in the amendment.
The officer does not have to have, or give, any reason for starting a compliance check enquiry. In particular, the taxpayer will not be advised whether he has been selected at random for an audit. Compliance check enquiries may be full enquires, or may be limited to ‘aspect’ enquiries.
6.1.2 During the compliance check enquiry
In the course of the compliance check enquiry the officer may require the taxpayer to produce documents, accounts or any other information required. The taxpayer can appeal to the Tax Tribunal against such a requirement.
6.1.3 Completion of a compliance check enquiry
An officer must issue a notice that the compliance check enquiry is complete, state his conclusions and amend the individual’s self-assessment, partnership statement, or claim accordingly.
The officer cannot then make a further compliance check enquiry into that return. HMRC may, in limited circumstances, raise a discovery assessment if they believe that there has been a loss of tax.
6.2 Determinations
If notice has been served on a taxpayer to submit a return but the return is not submitted by the due filing date, an officer of HMRC may make a determination of the amounts liable to income tax and CGT and of the tax due. Such a determination must be made to the best of the officer’s information and belief, and is then treated as if it were a self-assessment. This enables the officer to seek payment of tax, including payments on account for the following year and to charge interest.
A determination must be made within four years following the end of the relevant tax year.
6.3 Discovery assessments
If an officer of HMRC discovers that profits have been omitted from assessment, that any assessment has become insufficient, or that any relief given is, or has become excessive, an assessment may be raised to recover the tax lost.
If the tax lost results from an error in the taxpayer’s return but the return was made in accordance with prevailing practice at the time, no discovery assessment may be made.
A discovery assessment may only be raised where a return has been made if:
- There has been careless or deliberate understatement by the taxpayer or his agent, or
- At the time that compliance check enquiries on the return were completed, or could no longer be made, the officer did not have information to make him aware of the loss of tax.
Information is treated as available to an officer if it is contained in the taxpayer’s return or claim for the year or either of the two preceding years, or it has been provided as a result of a compliance check enquiry covering those years, or it has been specifically provided.
The time limit for raising a discovery assessment is 4 years from the end of the tax year but this is extended to 6 years if there has been careless understatement and 20 years if there has been deliberate understatement. The taxpayer may appeal against a discovery assessment within 30 days of issue.
6.4 Dishonest conduct of tax agents
FAST FORWARD HMRC can investigate dishonest conduct by a tax agent and issue a civil penalty of up to £50,000 where there has been dishonest conduct.
HMRC can investigate whether there has been dishonest conduct by a tax agent (ie an individual who, in the course of business, assists clients with their tax affairs). Dishonest conduct occurs when a tax agent does something dishonest with a view to bringing about a loss of tax.
HMRC can issue a civil penalty of up to £50,000 where there has been dishonest conduct and the tax agent fails to supply the information or documents that HMRC has requested.
7 Penalties
7.1 Penalties for errors 12/10, 12/12
| There is a common penalty regime for errors in tax returns, including income tax, NICs, corporation tax and VAT. Penalties range from 30% to 100% of the Potential Lost Revenue. Penalties may be reduced. |
FAST FORWARD
A common penalty regime for errors in tax returns for income tax, national insurance contributions, corporation tax and value added tax.
A penalty may be imposed where a taxpayer makes an inaccurate return if he has:
- Been careless because he has not taken reasonable care in making the return or discovers the error later but does not take reasonable steps to inform HMRC, or
- Made a deliberate error but does not make arrangements to conceal it, or
- Made a deliberate error and has attempted to conceal it eg by submitting false evidence in support of an inaccurate figure.
Note that an error which is made where the taxpayer has taken reasonable care in making the return and which he does not discover later, does not result in a penalty.
In order for a penalty to be charged, the inaccurate return must result in:
- An understatement of the taxpayer’s tax liability, or
- A false or increased loss for the taxpayer, or
- A false or increased repayment of tax to the taxpayer.
If a return contains more than one error, a penalty can be charged for each error.
The rules also extend to errors in claims for allowances and reliefs and in accounts submitted in relation to a tax liability.
Penalties for error also apply where HMRC has issued an assessment estimating a person’s liability where:
- A return has been issued to that person and has not been returned, or
- The taxpayer was required to deliver a return to HMRC but has not delivered it.
The taxpayer will be charged a penalty where
- The assessment understates the taxpayer’s liability to income tax, capital gains tax, corporation tax or VAT, and
- The taxpayer fails to take reasonable steps within 30 days of the date of the assessment to tell HMRC that there is an under-assessment.
The amount of the penalty for error is based on the Potential Lost Revenue (PLR) to HMRC as a result of the error. For example, if there is an understatement of tax, this understatement will be the PLR.
The maximum amount of the penalty for error depends on the type of error:
| Type of error | Maximum penalty payable |
| Careless | 30% of PLR |
| Deliberate not concealed | 70% of PLR |
| Deliberate and concealed | 100% of PLR |
Alexander is a sole trader. He files his tax return for 2015/16 on 10 January 2017. The return shows his trading income to be £60,000. In fact, due to carelessness, his trading income should have been stated to be £68,000.
State the maximum penalty that could be charged by HMRC on Alexander for his error.
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The Potential Lost Revenue (PLR) as a result of Alexander’s error is: |
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| £(68,000 – 60,000) = £8,000 × [40% (income tax) + 2% (Class 4 NICs)] Alexander’s error is careless so the maximum penalty for error is: | £3,360 |
| £3,360 × 30% | £1,008 |
A penalty for error may be reduced if the taxpayer tells HMRC about the error – this is called a disclosure. The reduction depends on the circumstances of the disclosure and the help that the taxpayer gives to HMRC in relation to the disclosure.
An unprompted disclosure is one made at a time when the taxpayer has no reason to believe HMRC has discovered, or is about to discover, the error. Otherwise, the disclosure will be a prompted disclosure.
The minimum penalties that can be imposed are as follows:
| Type of error | Unprompted | Prompted |
| Careless | 0% of PLR | 15% of PLR |
| Deliberate not concealed | 20% of PLR | 35% of PLR |
| Deliberate and concealed | 30% of PLR | 50% of PLR |
Sue is a sole trader. She files her tax return for 2015/16 on 31 January 2017. The return shows a trading loss for the year of £(80,000). In fact, Sue has deliberately increased this loss by £(12,000) and has submitted false figures in support of her claim. HMRC initiate a review into Sue’s return and in reply Sue then makes a disclosure of the error. Sue is a higher rate taxpayer due to her substantial investment income and she has made a claim to set the loss against general income in 2015/16.
State the maximum and minimum penalties that could be charged by HMRC on Sue for her error.
The potential lost revenue as a result of Sue’s error is:
£12,000 × 40% £4,800
Sue’s error is deliberate and concealed so the maximum penalty for error is:
£4,800 × 100% £4,800
Sue has made a prompted disclosure so the minimum penalty for error is:
£4,800 × 50% £2,400
The help that the taxpayer gives to HMRC relates to when, how and to what extent the taxpayer:
- Tells HMRC about the error, making full disclosure and explaining how the error was made, and
- Gives reasonable help to HMRC to enable it to quantify the error, and Allows access to business and other records and other relevant documents.
A taxpayer can appeal to the First Tier Tribunal against:
- The penalty being charged.
- The amount of the penalty.
7.2 Penalties for late notification of chargeability
| A common penalty regime also applies to late notification of chargeability. |
FAST FORWARD
A common penalty regime also applies to certain taxes for failures to notify chargeability to, or liability to register for, tax that result in a loss of tax. The taxes affected include income tax, NICs, PAYE, CGT, corporation tax and VAT. Penalties are behaviour related, increasing for more serious failures, and are based on the ‘potential lost revenue’.
The minimum and maximum penalties as percentages of PLR are as follows:
| Behaviour | Maximum penalty | Minimum penalty with unprompted disclosure | Minimum penalty with prompted disclosure | ||
| Deliberate and concealed | 100% | 30% | 50% | ||
| Deliberate but not concealed | 70% | 20% | 35% | ||
| >12m | <12m | >12m | <12m | ||
| Careless | 30% | 10% | 0% | 20% | 10% |
Note that there is no zero penalty for reasonable care (as there is for penalties for errors on returns – see above), although the penalty may be reduced to 0% if the failure is rectified within 12 months through unprompted disclosure. The penalties may also be reduced at HMRC’s discretion in ‘special circumstances’. However, inability to pay the penalty is not a ‘special circumstance’.
The same penalties apply for failure to notify HMRC of a new taxable activity.
Where the taxpayer’s failure is not classed as deliberate, there is no penalty if he can show he has a ‘reasonable excuse’. Reasonable excuse does not include having insufficient money to pay the penalty. Taxpayers have a right of appeal against penalty decisions to the First Tier Tribunal, which may confirm, substitute or cancel the penalty.
7.3 Penalties for late filing of tax return
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A penalty can be charged for late filing of a tax return based on how late the return is and how much tax is payable.
An individual is liable to a penalty where a tax return is filed after the due filing date. The penalty date is the date on which the return will be overdue (ie the date after the due filing date).
The initial penalty for late filing of the return is £100.
If the failure continues after the end of the period of 3 months starting with the penalty date, HMRC may give the individual notice specifying that a daily penalty of £10 is payable for a maximum of 90 days. The daily penalty runs from a date specified in the notice which may be earlier than the date of the notice but cannot be earlier than the end of the 3-month period.
If the failure continues after the end of the period of 6 months starting with the penalty date, a further penalty is payable. This penalty is the greater of:
- 5% of the tax liability which would have been shown in the return; and
- £300.
If the failure continues after the end of the period of 12 months starting with the penalty date, a further penalty is payable. This penalty is determined in accordance with the taxpayer’s conduct in withholding information which would enable or assist HMRC in assessing the taxpayer’s liability to tax. The penalty is computed as follows:
| Type of conduct | Penalty |
| Deliberate and concealed | Greater of: • 100% of tax liability which would have been shown on return; and • £300 |
| Deliberate not concealed | Greater of:
• 70% of tax liability which would have been shown on return; and • £300 |
| Type of conduct | Penalty |
| Any other case (eg careless) | Greater of:
• 5% of tax liability which would have been shown on return; and • £300 |
7.4 Penalties for offshore non-compliance
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There may be increased penalties for offshore non-compliance and an additional penalty where there is a relevant offshore asset move intended to prevent or delay HMRC from discovering a potential loss of revenue.
Offshore non-compliance relates to non-compliance involving an offshore matter.
Key term An offshore matter relates to income arising from a source in a territory outside the UK; assets situated or held in a territory outside the UK; activities carried on wholly or mainly in a territory outside the UK; anything having effect as if it were income assets or activities of a similar kind.
The penalties for failure to notify chargeability to tax, late filing and errors may be increased where an offshore matter is involved. The rates of these increased penalties are linked to how much information the particular offshore territory shares with HMRC so that the more difficult it is for HMRC to obtain information, the higher the penalty.
There is an additional penalty where there is a relevant offshore asset move intended to prevent or delay HMRC from discovering a potential loss of revenue once a non-compliance penalty for deliberate failure has been imposed. A relevant offshore asset move includes where:
- An asset ceases to be situated or held in specified territory listed in the Offshore Asset Moves Penalty (Specified Territories) Regulations 2015 (broadly one which automatically shares information with HMRC) and becomes situated or held in a non-specified territory (broadly one which does not automatically share information with HMRC); or
- The person who holds the asset ceases to be resident in a specified territory and becomes resident in a non-specified territory.
| The examination team has stated that candidates are expected to know that these additional penalties exist but do not need to know the precise amounts that may be charged nor the categorisation of particular territories. |
Exam focus point
7.5 Penalty for late payment of tax
This penalty was dealt with in Section 5.2 earlier in this chapter.
7.6 Penalties for failure to keep records
The maximum (mitigable) penalty for each failure to keep and retain records is £3,000 per tax year/accounting period.
8 Appeals
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Disputes between taxpayers and HMRC can be dealt with by an HMRC internal review or by a Tribunal hearing.
8.1 Internal reviews
For direct taxes, appeals must first be made to HMRC, which will assign a ‘caseworker’.
For indirect taxes, appeals must be sent directly to the Tribunal, although the taxpayer can continue to correspond with his caseworker where, for example, there is new information.
At this stage the taxpayer may be offered, or may ask for, an ‘internal review’, which will be made by an objective HMRC review officer not previously connected with the case. This is a less costly and more effective way to resolve disputes informally, without the need for a Tribunal hearing. An appeal to Tribunal cannot be made until any review has ended.
The taxpayer must either accept the review offer, or notify an appeal to the Tribunal within 30 days of being offered the review, otherwise the appeal will be treated as settled.
HMRC must usually carry out the review within 45 days, or any longer time as agreed with the taxpayer. The review officer may decide to uphold, vary or withdraw decisions.
After the review conclusion is notified, the taxpayer has 30 days to appeal to the Tribunal.
8.2 Tribunal hearings
If there is no internal review, or the taxpayer is unhappy with the result of an internal review, the case may be heard by the Tribunal. The person wishing to make an appeal (the appellant) must send a notice of appeal to the Tribunal. The Tribunal must then give notice of the appeal to the respondent (normally HMRC).
The Tribunal is made up of two ‘tiers’:
(a) A First Tier Tribunal and (b) An Upper Tribunal.
The case will be allocated to one of four case ‘tracks’:
- Complex cases, which the Tribunal considers will require lengthy or complex evidence or a lengthy hearing, or involve a complex or important principle or issue, or involves a large amount of money. Such cases will usually be heard by the Upper Tribunal,
- Standard cases, heard by the First Tier Tribunal, which have detailed case management and are subject to a more formal procedure than basic cases,
- Basic cases, also heard by the First Tier Tribunal, which will usually be disposed of after a hearing, with minimal exchange of documents before the hearing, and
- Paper cases, dealt with by the First Tier Tribunal, which applies to straightforward matters such as fixed filing penalties and will usually be dealt with in writing, without a hearing.
A decision of the First Tier Tribunal may be appealed to the Upper Tribunal.
Decisions of the Upper Tribunal are binding on the Tribunals and any affected public authorities. A decision of the Upper Tribunal may be appealed to the Court of Appeal.
9 Tax offenders
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Deliberate tax defaulters whose actions result in a tax loss in excess of £25,000 may have their details published by HMRC on the Internet.
9.1 ‘Naming and shaming’ tax offenders
All deliberate tax defaulters (individuals and companies) whose actions result in a tax loss to HMRC in excess of £25,000 will have their names and details (such as address and profession) published on the Internet by HMRC.
Names will not be published of those who make a full unprompted disclosure or a full prompted disclosure within the required time. Details will be published quarterly within one year of the penalty becoming final and will be removed from publication one year later.
9.2 Monitoring of serious tax offenders
Chapter roundup
Taxpayers who incur a penalty for deliberate evasion in respect of tax of £5,000 or more are required to submit returns for up to the following five years showing more detailed business accounts information and detailing the nature and value of any balancing adjustments within the accounts.
| | Taxes are administered by Her Majesty’s Revenue and Customs. |
| | Individuals who do not receive a tax return or who have a new source of income or gains must notify their chargeability to income tax or CGT. |
| | Tax returns must usually be filed by 31 October (paper) or 31 January (electronic) following the end of the tax year. |
| | If a paper return is filed the taxpayer can ask HMRC to compute the tax due. Electronic returns have tax calculated automatically. |
| | Two payments on account and a final balancing payment of income tax and Class 4 NICs are due. |
| | A penalty is chargeable where tax is paid after the due date based on the amount of unpaid tax. Up to 15% of that amount is payable where the tax is more than 12 months late. |
| | Capital gains tax is usually due on 31 January following the end of the tax year. However, CGT may be paid in instalments where consideration is received over a period in excess of 18 months or in certain circumstances where the disposal is a gift. |
| | A compliance check enquiry into a return, claim or election can be started by an officer of HMRC within a limited period. |
| | HMRC can investigate dishonest conduct by a tax agent and issue a civil penalty of up to £50,000 where there has been dishonest conduct. |
| | There is a common penalty regime for errors in tax returns, including income tax, NICs, corporation tax and VAT. Penalties range from 30% to 100% of the Potential Lost Revenue. Penalties may be reduced. |
| | A common penalty regime also applies to late notification of chargeability. |
| | A penalty can be charged for late filing of a tax return based on how late the return is and how much tax is payable. |
| | There may be increased penalties for offshore non-compliance and an additional penalty where there is a relevant offshore asset move intended to prevent or delay HMRC from discovering a potential loss of revenue. |
| | Disputes between taxpayers and HMRC can be dealt with by an HMRC internal review or by a Tribunal hearing. |
| | Deliberate tax defaulters whose actions result in a tax loss in excess of £25,000 may have their details published by HMRC on the Internet. |
Quick quiz
- By when must a taxpayer who has a new source of income in 2015/16 give notice of his chargeability to income tax?
- By when must a taxpayer file a paper tax return for 2015/16?
- What are the normal payment dates for income tax?
- What penalties are due in respect of income tax payments on account that are paid two months late?
- When may CGT be paid by ten annual instalments?
- Which body hears tax appeals?
Answers to quick quiz
- Within six months of the end of the year, ie by 5 October 2016.
- By 31 October 2016 or, if the return is issued after 31 July 2016, by the end of 3 months following the issue of the notice to file the return.
- Two payments on account of income tax are due on 31 January in the tax year and on the 31 July following. A final balancing payment is due on 31 January following the tax year.
- Penalties do not apply to late payment of payment on account.
- Provided the disposal is not eligible for gift relief, the ten annual instalment option is available on transfers of:
- land or an interest in land, or
- controlling holdings of share or securities in a company (quoted or unquoted), or any shares or securities in an unquoted company
- The Tax Tribunal which consists of the First Tier Tribunal and the Upper Tribunal.
| Number | Level | Marks | Time |
| Q16 | Introductory | 17 | 33 mins |
