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When does HMRC charge a 30 per cent penalty over a tax dispute?

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After weeks of controversy, Tory party chair Nadhim Zahawi has admitted making “careless and not deliberate” errors in a tax dispute settlement with HM Revenue & Customs. 

The government’s ethics adviser, Sir Laurie Magnus, is investigating. But tax advisers have been interested by reports that the penalty paid by Zahawi was 30 per cent of the tax owed; a total payment estimated at £5mn in a dispute relating to shares allegedly held in an offshore trust in Gibraltar.

Zahawi has not confirmed the sum paid or commented on the reported penalty, and HMRC will not talk about individual taxpayers. But how are taxpayers generally treated in high-end disputes with HMRC?

I’ve got my taxes wrong — what will the penalty be?

It depends on several factors, but generally “the more serious the error and the more serious the behaviour, the higher the penalty will be”, says Margaret Curran, a technical officer at the Chartered Institute of Taxation. 

There are four thresholds based on level of intent, combined with a view of whether the taxpayer volunteers a disclosure, or is prompted to act by HMRC. Generally, the more you cooperate with HMRC, the lower the penalty. 

  1. If you made a genuine mistake and took reasonable steps to ensure that tax payments were correct, no penalty is charged.

  2. If a mistake is deemed careless, defined by law as a failure to take “reasonable care”, taking into account the sophistication of the taxpayer, the maximum penalty is 30 per cent of the tax due. The minimum is zero if you disclose to HMRC first, or 15 per cent if you act after they approach you.

  3. If the error is deliberate but not concealed, the maximum penalty is 70 per cent and the minimum penalty is 20 per cent, rising to 35 per cent for disclosure prompted by HMRC. 

  4. If it is deemed deliberate and concealed, perhaps if a taxpayer falsified an invoice or provided misleading information, the maximum penalty would be 100 per cent and the minimum penalty 30 per cent, rising to 50 per cent for prompted disclosures. 

Taxpayers penalised for deliberate bad behaviour who have not fully cooperated with HMRC are named publicly. About 480 taxpayers have been named as deliberate tax defaulters since March last year.

Advisers warn that HMRC is pushing to define more cases as deliberate, and agents will often try to negotiate a case branded deliberate to be recategorised as careless.

What if it relates to matters offshore?

Penalties can be higher if the dispute involves funds parked offshore, for instance in a tax haven. HMRC has split overseas countries into three categories according to their deemed level of risk. 

  • Category 1 territories, including the US and most European countries, have the same penalties as the UK. 

  • Category 2 territories, covering most other locations — including Gibraltar — have a top penalty of 45 per cent for carelessness and 150 per cent for deliberate and concealed error. 

  • Category 3 territories, which include Monaco and others listed here, have a maximum penalty of 60 per cent for carelessness and 200 per cent for deliberate and concealed error. 

Higher penalties generally apply to countries that aren’t signed up to information exchange agreements with HMRC.

Where a taxpayer failed to comply with offshore tax for the years to 2016-17 by September 30 2018, the maximum penalty rate is 200 per cent, though this can be reduced by disclosure cooperation to a minimum of 100 per cent. Curran added that a penalty will not be charged if you have a “reasonable excuse”.

How far back can HMRC go?

HMRC can probe missing taxes over four years where a mistake was genuine, six years where it was careless, and 20 years where action was deliberate. 

The offshore time limits are a little longer, where investigations can stretch back 12 years for carelessness, but HMRC is precluded from acting if it had the information from other tax authorities but failed to use it within six years.

What about interest? 

As well as a penalty, interest will be charged on delayed payments, applied from when the tax was originally owed to when it was eventually paid. The late payment rate has risen sharply recently in response to market rates and is now charged at the Bank of England base rate plus 2.5 per cent, or 6 per cent.

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