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HMRC policy change on behaviour-based penalties

HMRC policy change on behaviour-based penalties

This article covers the penalty for inaccuracies in returns and documents, and will be important for all employers who are subject to HMRC reviews of their PAYE/benefit records.

Colin Ben-Nathan


KPMG in the UK


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In summary, when an employer has taken a significant period to correct or disclose an inaccuracy (normally at least 3 years), then the lower threshold for a penalty in respect of the inaccuracy will be increased by 10 percentage points.

Where an employer has underpaid PAYE or NIC due to a careless inaccuracy in a return or other document submitted to HMRC, legislation states that the penalty range as:

  • 0% to 30% if the disclosure to HMRC is unprompted,; or,
  • 15% to 30% if the disclosure is prompted (note that disclosures made during an employer compliance check will generally be regarded as prompted).

However, where exactly the penalty falls in these ranges is determined by the quality of the disclosure.

HMRC establishes the quality of the disclosure by considering how much the employer:

  1. tells HMRC about what is wrong;
  2. helps HMRC to work out what is wrong; and,
  3. provides HMRC with access to records.

Now, in light of this recent policy change, HMRC will also take into account the length of time it has taken the employer to correct or disclose the inaccuracy when establishing the quality of a disclosure.

If the employer has taken a “significant period”, which is stated in the factsheets to be at least 3 years, then the lower thresholds mentioned above will be increased to 10% and 25% respectively (i.e. 10 percentage points higher than previously). The possibility of suspending a penalty for a careless inaccuracy for a period of up to 2 years is unaffected by this change.

The 10 percentage points increase will also be applied to the higher penalty ranges for deliberate behaviour.

As noted above, this is a change in policy rather than legislation. However, the penalty regime was designed to encourage taxpayers to come forward on a voluntary basis, and the new policy could be said to run counter to that objective. Albeit, HMRC no doubt consider that there has been so much publicity over the past few years that taxpayers ought to have regularised their affairs before now.

Of course there will be cases where employers are aware of inaccuracies and/or underpayments until HMRC carry out a compliance check. Employers should therefore consider increasing the frequency of their reviews of policies and procedures to identify problems early.

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