Penalty for Failing to Notify
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:-
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- Whether the failure was prompted or unprompted: and
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- 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:-
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- Identify the behaviour leading to the failure and whether the disclosure was prompted or unprompted;
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- Identify the maximum (a) and minimum (b) penalty;
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- Deduct the minimum penalty from the maximum penalty to work out the maximum permitted reduction for disclosure (c): c = a – b;
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- Work out the percentage reduction for the quality of the disclosure (d);
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- 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;
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- Deduct the actual reduction percentage from the maximum penalty percentage to work out the penalty percentage (f): f = a – e;
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- 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.
Example 1
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%.
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- The failure was deliberate but without concealment and the disclosure was unprompted but more than 12 months late.
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- The maximum penalty is 70% and the minimum 20%.
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- The maximum permitted deduction for disclosure is 50% (70% – 20%).
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- The reduction for the quality of the disclosure is 80%.
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- The actual reduction percentage for disclosure is 40% (50% x 80%).
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- The penalty percentage is 30% (70% – 40%).
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- The penalty is £1,500 (PLR £5,000 x 30%).
Example 2
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%.
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- The failure was deliberate but without concealment and the disclosure was unprompted and made less than 12 months late.
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- The maximum penalty is 30% and the minimum 0%.
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- The maximum permitted deduction for disclosure is 30% (30% -0%).
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- The reduction for the quality of the disclosure is 100%.
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- The actual reduction percentage for disclosure is 30% (30% x 100%).
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- The penalty percentage is 0% (30% – 30%).
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- The penalty is nil (PLR £5,000 x 0%).
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Prompted or Unprompted
A disclosure is:-
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- 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;
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- 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:-
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- They became aware that HMRC had obtained information concerning the obligation to notify;
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- HMRC had contacted them regarding the particular tax or activity to which the obligation to notify relates; or
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- 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:-
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- Telling – 30%
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- Helping – 40%
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- 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:-
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- Timing;
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- Nature; and
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- Extent.