Will I have to pay a penalty for underpaid tax?

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Penalties as large as 100% of the total amount of tax that is owed to HMRC can be applied. 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 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 penalty that might otherwise be added onto 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 overall penalty to be paid. After this, written representations can be made to HMRC within a specified timeframe if the penalty figures are not agreed

Along with any penalties, 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. You can have a confidential initial consultation for free with our expert solicitors if you want to discuss your situation. Get in touch with us today.

Jonathan Wright

Written by Jonathan Wright

Jonathan Wright joined Richard Nelson LLP in 2006, having previously spent nearly ten years defending complex business crime and fraud cases. He became a partner in 2009. Jonathan's success as a criminal defence solicitor and tax investigation specialist has led to many accolades from the Legal 500.

Read more about Jonathan Wright.

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