Guidance

Employer and contractor returns and ‘old’ penalty rules — CC/FS19

Updated 25 February 2022

This factsheet tells you about the ‘old’ penalty rules and when they apply.

This factsheet is one of a series. For the full list, see ‘HMRC compliance checks factsheets’.

If you need help

If you have any health or personal circumstances that may make it difficult for you to deal with us, please tell the officer who has contacted you. We’ll help you in whatever way we can. For more information, see ‘get help from HMRC if you need extra support’.

You can also ask someone else to deal with us on your behalf, for example, a professional adviser, friend or relative. We may however still need to talk or write to you directly about some things. If we need to write to you, we’ll send a copy to the person you’ve asked us to deal with. If we need to talk to you, they can be with you when we do, if you prefer.

Why we’ve given you this factsheet

We’ve given you this factsheet because we’re checking whether you’ve filed a late or incorrect employer or contractor return for a period before our new penalty rules started. If penalties are also due under the new penalty rules the officer carrying out the compliance check will tell you which returns and years they apply to. They’ll also give you a factsheet which explains how we calculate those penalties.

For more information about the new penalty rules, see factsheets:

• CC/FS7a, ‘Penalties for inaccuracies in returns or documents’
• CC/FS11, ‘Penalties for failure to notify’
• CC/FS18b, ‘Penalties for failure to file returns on time — the Construction Industry Scheme (CIS)’

The rest of this factsheet tells you about the old penalty rules.

The old penalty rules apply to:

• incorrect forms P35 and P14 for the tax year 2007 to 2008 and earlier
• incorrect contractor returns due to be filed on or before 19 March 2009
• incorrect P11d(b) Class 1A NIC returns for the tax year 2009 to 2010 and earlier
• late contractor returns due to be filed on or before 19 October 2011
• late forms P35 and P14 due to be filed for tax year 2013 to 2014 and earlier
• failure to file the final Real Time Information (RTI) Full Payment Submission (FPS) for tax year 2012 to 2013 by 19 April 2013 and the information was not submitted on an Earlier Year Update (EYU) before 19 May 2013

The old rules also apply for all years to:

• incorrect forms P11D
• late forms P11D
• late P11D(b) Class 1A National Insurance contributions returns

When you may have to pay a penalty

You may have to pay a penalty if:

• you do not file a return on time, do not notify that you are liable to pay tax or there is an error in a return
• as a result, you have understated the amount of PAYE tax, National Insurance contributions, Student Loan deductions or Construction Industry Scheme deductions you were liable to pay

We may charge you a tax-related penalty under the old penalty rules if the error or failure happened because of negligence or fraud.

The different types of penalty and how they are calculated

Fixed penalties

Some penalties are for a fixed amount. For example, if you’re late filing your employer’s annual return (P35), the penalty will be for the same fixed amount for each month the return is late. How much we charge you will depend on how many people should be on the return. Some fixed penalties have a capped maximum amount.

Maximum penalty of a set amount

Some penalties have a maximum amount set by the law. For example, if your P11D (expenses and benefits) return is incorrect due to your neglect or fraud, the maximum penalty is £3,000 for each incorrect return. We’ll decide what penalty to charge you, up to the maximum, after considering your specific circumstances.

Tariff based penalties

Some penalties are tariff based. The penalty normally increases the more times you get something wrong. For example, if you send in a contractor monthly return (CIS300) more than 12 months late, we can charge you a maximum penalty of £3,000. However, we’ll charge a lower penalty the first time you do this but the penalty will increase the more times it happens.

Initial and daily penalties

These penalties are in 2 parts. If you fail to do something that you should have done, for example, if you fail to submit a P11D or P9D return, we’ll charge you an initial penalty. We’ll then charge you daily penalties until you put the failure right.

Tax-related penalties

We charge tax-related penalties as a percentage of the difference between the amount you should have paid or declared to us and the amount you actually paid or declared to us. The percentage we can charge can be up to 100% of the difference. For example, if you should have paid or declared £10,000 but the amount you paid or declared was £6,000, we may charge you a penalty of up to £4,000.

To work out the percentage penalty that we’ll charge, we start with 100% and then reduce that percentage depending on 3 things — disclosure, co-operation and seriousness. These are explained below. The better the disclosure and co-operation, the larger the reduction we can give to the penalty percentage.

Disclosure — how much you tell us about the error or failure

If you make a full disclosure at the start of our compliance check, we can normally reduce the penalty by up to 20%. But if you make a full disclosure before we start our check when you had no reason to believe we would find out about it, we can reduce the penalty by up to 30%.

If you do not tell us that anything is wrong until near the end of our check, we’ll give you very little or no reduction for disclosure. The size of the reduction will depend on the individual circumstances.

Co-operation — how well you co-operate with us throughout the compliance check

We can reduce the penalty by up to 40% for co-operation.

Co-operation includes:

• letting us have the information we need quickly
• giving us records when we ask for them
• agreeing to meet us if we believe this will help us with our check
• answering our questions as fully and correctly as possible
• giving us all the relevant facts
• making a payment towards anything you owe us before we have calculated the final figure — we call this a ‘payment on account’

If you:

• delay giving us the information we need
• give us misleading answers and generally obstruct our check
  

we’ll give you little or no reduction for co-operation.

Seriousness — the overall seriousness of the errors in your tax return or the failure to tell us about your liability to pay tax

We can reduce the penalty by up to 40% depending on the overall seriousness of the errors or failure. The size of the reduction we can give will depend on:

• what you did to get things wrong
• the reasons why you got things wrong
• how long you continued to get things wrong
• the amount of money involved

If, through negligence, you made a straightforward error involving a modest amount of tax, we may give you a considerable reduction.

If you deliberately tried to evade tax, we’ll give you little or no reduction.

When we’ve considered disclosure, co-operation and seriousness, we’ll talk to you about the size of the penalty percentage we believe is appropriate. If you think there’s something that affects the amount of penalty that we have not taken into account, please tell us. We’ll consider what you say. If we agree with you, we’ll reduce the penalty percentage.

Example of how we calculate a tax-related penalty

Amount that should have been shown on return	£10,000
Actual amount shown on the return	£6,000
Difference (on which penalty will be charged)	£4,000

After consideration of all the facts, the reductions to the penalty are:

Disclosure	10%
Co-operation	25%
Seriousness	25%
Total reduction	60%

Maximum penalty 100% less reduction 60% means the penalty to be charged is 40%. In this example, the penalty payable would be £1,600 (£4,000 × 40% = £1,600).

How you can pay any tax, interest and penalties that are due

We’ll work out the correct amount you need to pay, including any interest. We’ll also tell you about any penalties that are due. Then:

• if we agree on the amounts due, we’ll invite you to enter into a contract with us to pay the tax, interest and penalties
• if we cannot agree on the amounts due, we’ll send you decision notices showing the tax and penalties we consider are due for each tax period — we’ll explain these decision notices to you at the time

We’ll calculate interest on the tax due automatically.

If you disagree

If there’s something that you do not agree with, please tell us. 

If we make a decision that you can appeal against, we’ll write to you about the decision and tell you what to do if you disagree. You’ll usually have 3 options. Within 30 days, you can: 

• send new information to the officer dealing with the check and ask them to take it into account
• have your case reviewed by an HMRC officer who has not been involved in the matter
• arrange for an independent tribunal to hear your appeal and decide the matter

Whichever you choose, you may also be able to ask for an HMRC specialist officer to act as a neutral facilitator to help resolve the dispute. We call this Alternative Dispute Resolution (ADR).  

ADR is only available for disputes that relate to specific tax areas. The officer dealing with the check will tell you if ADR is available for your dispute. For more information about appeals and ADR, see factsheets: 

• ‘How to get a review of an HMRC decision’
• CC/FS21, ‘alternative dispute resolution’

Your rights when we are considering penalties

The European Convention on Human Rights gives you certain important rights. If we’re considering penalties, we’ll tell you. We’ll also tell you that these rights apply and ask you to confirm that you understand them. These rights are that:

• if we ask you any questions to help us decide whether to charge you a penalty, you have the right not to answer them — the amount of help you give us when we’re considering penalties is entirely a matter for you to decide
• when deciding whether to answer our questions, you may want to get advice from a professional adviser — particularly if you do not already have one
• if you disagree with us about the tax or any penalties we believe are due, you can appeal — if you appeal about both tax and penalties, you have the right to ask for both appeals to be considered together
• you have the right to apply for funded legal assistance for dealing with any appeal against certain penalties
• you’re entitled to have the matter of penalties dealt with without unreasonable delay

You can find full details about these rights in factsheet CC/FS9, ‘The Human Rights Act and penalties’.

What happens if you give us information you know to be untrue

We may carry out a criminal investigation with a view to prosecution if you:

• give us information you know to be untrue, whether verbally or in a document
• dishonestly misrepresent your liability to tax or claim payments to which you are not entitled

More information

Our privacy notice 

Our privacy notice sets out the standards that you can expect from us when we ask for information or hold information about you.

If you are not happy with our service

Please tell the person or office you’ve been dealing with. They’ll try to put things right. If you are still not happy, they’ll tell you how to make a formal complaint.