How to Work out a Penalty for Failing to Notify
Finance Act 2008 lays down maximum and minimum penalty for failure to notify. The only reduction of the maximum penalty percentage permitted is a reduction for disclosure. A disclosure can be prompted unprompted.
An unprompted disclosure earns a greater reduction in the penalty than a prompted disclosure.
The penalty cannot be reduced below the statutory minimum unless HMRC agrees to make a special reduction. The statutory minimum depends on the behaviour leading to the failure and:-
- Whether the failure was prompted or unprompted: and
- For non-deliberate failures, when the disclosure was made.
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Calculating the Penalty
The stages for calculating the amount of the penalty are as follows:-
- Identify the behaviour leading to the failure and whether the disclosure was prompted or unprompted;
- Identify the maximum (a) and minimum (b) penalty;
- Deduct the minimum penalty from the maximum penalty to work out the maximum permitted reduction for disclosure (c): c = a – b;
- Work out the percentage reduction for the quality of the disclosure (d);
- Apply the percentage reduction for the quality of the disclosure to the maximum permitted reduction for disclosure to work out the actual reduction percentage for disclosure (e): e = d x c;
- Deduct the actual reduction percentage from the maximum penalty percentage to work out the penalty percentage (f): f = a – e;
- Apply the penalty percentage to the potential lost revenue (PLR) to work out the amount of the penalty: amount of the penalty = PLR x f.
A person failed to notify on time and did so more than 12 months late. The failure was deliberate but without concealment and the PLR is £5,000.
The disclosure was unprompted and the quality of the disclosure justifies a reduction for disclosure of 80%.
- The failure was deliberate but without concealment and the disclosure was unprompted but more than 12 months late.
- The maximum penalty is 70% and the minimum 20%.
- The maximum permitted deduction for disclosure is 50% (70% – 20%).
- The reduction for the quality of the disclosure is 80%.
- The actual reduction percentage for disclosure is 40% (50% x 80%).
- The penalty percentage is 30% (70% – 40%).
- The penalty is £1,500 (PLR £5,000 x 30%).
A person failed to notify on time but did so less than 12 months late. The failure was non-deliberate and the PLR is £5,000.
The disclosure was unprompted and the quality of the disclosure justifies a reduction for disclosure of 100%.
- The failure was deliberate but without concealment and the disclosure was unprompted and made less than 12 months late.
- The maximum penalty is 30% and the minimum 0%.
- The maximum permitted deduction for disclosure is 30% (30% -0%).
- The reduction for the quality of the disclosure is 100%.
- The actual reduction percentage for disclosure is 30% (30% x 100%).
- The penalty percentage is 0% (30% – 30%).
- The penalty is nil (PLR £5,000 x 0%).
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Prompted or Unprompted
A disclosure is:-
- Unprompted if is made when the person making it has no reason to believe that HMRC have discovered, or are about to discover, the relevant act or failure;
- Otherwise it is prompted.
HMRC have indicated that a disclosure will be treated as a prompted disclosure if it is made by a person after:-
- They became aware that HMRC had obtained information concerning the obligation to notify;
- HMRC had contacted them regarding the particular tax or activity to which the obligation to notify relates; or
- During the course of a compliance check concerning one tax liability, it becomes apparent that they have failed to notify liability to another tax or duty.
A disclosure made after an HMRC national campaign to highlight a particular type of potential non-compliance can still be treated as an unprompted disclosure.
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Reduction for Disclosure
A disclosure has three elements; telling, helping and allowing access. For making the reduction for disclosure, HMRC weights the three elements as follows:-
- Telling – 30%
- Helping – 40%
- Allowing access – 30%
The reduction for disclosure reflects the ‘quality’ of each of these three elements. For these purposes, para. 12 (4) defines quality to include:-
- Nature; and