Tax Investigations

HM Revenue and Customs (“HMRC”) New Penalties

Financial penalties can be imposed if you make an error in your return or other documents and that error means you have understated your tax, misrepresented your liability or not informed HMRC.

The new penalties will apply from 1 April 2008 but only for returns or documents due to be sent on or after 1 April 2009. They will apply to Income Tax, Corporation Tax, Capital Gains Tax, VAT, Excise Construction Industry Scheme, PAYE and National Insurance contributions. The Finance Act 2008 introduced and extended the penalty regime for all other main taxes with effect for periods commencing after 1 April 2009 filed after 1 April 2010.

What is new about the HMRC penalties?

HMRC have always imposed financial penalties for incorrect returns or documents. However penalties calculated in the future will be linked to behaviour that gives rise to the error. The penalty is calculated on the potential lost revenue and on the basis as to whether the tax loss is prompted or unprompted i.e. if HMRC are informed of an error by a taxpayer before they discovered it, then the error will be considered unprompted.  However if HMRC have already made an appointment with HMRC to inspect a company’s business records and an internal review is carried out by the company and an error is discovered, then the error will be considered by HMRC as prompted, since HMRC will say it only arose as a result of their pending inspection.

The penalty percentage will fall into six ranges:-

* Reasonable care – No penalty.

* Careless – Minimum 0% -30% Maximum [unprompted]

* Careless Minimum  Maximum 15% -30% maximum [prompted]

* Deliberate – Minimum 20% to Maximum of 70%. maximum [unprompted]

* Deliberate Minimum 35% to 70% Maximum [prompted]

* Deliberate & Concealed Minimum 30% to Maximum 100% [unprompted]

* Deliberate & Concealed – Minimum 50% to maximum 100% [prompted].

Reasonable care will vary according to their particular circumstances and abilities. HMRC will define what is reasonable in each case.


M&R Tax Advisers can assist you and your business in negotiating with HMRC to mitigate low penalties. We may be able to persuade HMRC to have penalties suspended for up to two years which will be cancelled if you have met all the conditions imposed on you. Penalties for deliberate and/or deliberate and concealed errors cannot be suspended.

We can assist in managing the voluntary disclosure of information to HMRC, often working with, if requested, your own accountant. We can prepare disclosure reports of financial affairs for submission to HMRC on your behalf. We can represent you in HMRC civil investigation proceedings. We can produce forensic examination reports relating to HMRC evidence in civil and criminal cases for use in proceedings in Tribunal or Court.