Will I have to pay a penalty for underpaid tax?

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Penalties for underpaid tax can be as large as 100% of the total amount of tax that is owed to HMRC. The size of the penalty is calculated by a series of factors such as the nature and circumstances of the tax irregularity and how any subsequent disclosure to HMRC is dealt with.

The current penalty regime has been in effect since April 2008. If all or any part of the tax owed fell due in a period prior to this, then a different penalty regime will apply to that part of the tax owed.

The current regime is a multi-stage process which uses a range of factors to calculate what is known as the ‘penalty percentage.’ This figure is then multiplied by the potential tax loss (known as the PLR) to give an overall penalty figure.

The process involves HMRC considering a number of factors, starting with how the error or irregularity occurred in the first place. It will then be considered whether or not any steps were taken either before or during the investigation which should be taken into account when considering whether any tax underpayment penalty should be reduced.

The first stage is for HMRC to decide on a penalty range based on the behaviour of the taxpayer and how the issue of unpaid tax came to the attention of HMRC. The range depends on whether the tax loss was a result of:

  • A lack of ‘reasonable care’;
  • A deliberate error (i.e. knowingly sending incorrect information);
  • A concealed deliberate error (not only sending incorrect information, but taking measures to cover it up).

It is important to note that ‘reasonable care’ is a tricky phrase with a definition that changes depending on the circumstances. For example, for individuals with a relatively straightforward income, HMRC will expect to see a much simpler record-keeping system than they would for a large business. However, in all cases, HMRC expects individuals to check with their agent or HMRC itself if there’s anything they’re not sure about.

The next stage is for HMRC to consider whether there are any factors that can mitigate any tax underpayment penalty that might otherwise be added to the underpaid tax. Cooperation with the investigation, considerations of the size and gravity of the offence and confessing to the irregularity (or even flagging it up yourself) can factor into mitigation. This is sometimes referred to as the ‘Telling, Helping, Giving’ stage as HMRC will consider the extent of mitigation by way of the following sub-categories:

  • Telling – i.e. whether the taxpayer has been fully open with HMRC in the investigation.
  • Helping – i.e. whether the taxpayer complied during the investigation by obtaining information or documents to assist the investigation.
  • Giving – i.e. whether the taxpayer provided or gave access to material in a timely manner within deadlines set by HMRC, thus avoiding the need for reliance on more formal information powers.

HMRC will then use its findings in the first two stages to apply a formula to calculate the penalty percentage and the overall underpaid tax penalty to be paid. After this, written representations can be made to HMRC within a specified timeframe if the penalty figures are not agreed upon.

Along with any penalties for underpaid tax, interest on the amount owed will also be charged, which varies depending on the time elapsed.

In cases where the HMRC finds underpaid tax for a number of years, any penalties and interest will be applied to the amount owed in each tax period. After a number of years, interest alone can add up to a substantial sum.

Due to the number and complexity of considerations pertaining to penalties for underpaid tax, it is strongly recommended that you consult a specialist tax lawyer as soon as possible if you are aware that an irregularity exists in your tax affairs.

If you would like to find out how we can assist to answer your concerns and resolve your problems, we are very keen to provide an initial, no-obligation consultation by telephone or email (whichever we think will be the quickest and clearest for you) to confirm – if we can help you (we usually can), how we can do this, and to give you a costs estimate so that you can decide if you wish to proceed. Get in touch with our tax investigation solicitors today.

We confirm that we will treat any information you give us as strictly confidential and purely for the purposes of responding to you. When you formally become a client, in addition to solicitors confidentiality, you will be also covered by Legal Professional Privilege (which only applies to solicitors and not accountants or tax advisers) which shields disclosure to third parties seeking information.


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