Penalties

There is a system of civil penalties which is now set out in the tax legislation and supported by extensive HMRC guidance.

The system ensures that innocent mistakes (anyone can make one of those) are not to be penalised.

Penalties are a form of punishment but HMRC are well aware that they are also a handy source of revenue. So be prepared – HMRC may well argue that your innocent mistake was no such thing.

If an error was careless then penalties will start to arise. The penalty tariff increases if a careless mistake is not fully and swiftly disclosed to HMRC. Here, perception is very important. On the one hand, you are not obliged to produce things that the inspector is not entitled to ask for – that is not a lack of co-operation although an inspector may think it is. On the other hand, you may think you are co-operating but if HMRC thinks differently how can you prove it?

The penalty tariff increases further if a taxpayer has acted deliberately. So the difference between deliberate actions and mere carelessness is important. Expect HMRC to argue that something is deliberate if they can.

Finally in the worst cases, where a deliberate act has been concealed by the taxpayer (this is a description of tax fraud), the penalty can amount to 100% of the lost tax – even up to twice that amount if there is offshore skulduggery involved. If that seems harsh, reflect on the position if the Proceeds of Crime Act applied following a prosecution.

In a recent, well-publicised case, assets exceeding £700,000 were ruled recoverable from a person who admitted to tax offences that only just exceeded £5,000. That was extreme, but the moral is clear, civil penalties are greatly preferable to serving time for tax offences, and civil penalties can be substantially mitigated without compromising your position, if you know what you are doing.