Guidance

Penalties for inaccuracies in interest restriction returns

Published 6 May 2022

This factsheet contains information about penalties we may charge if you’ve sent us an inaccurate return or other document.

This factsheet is one of a series. For the full list of factsheets in our compliance checks series, go to www.gov.uk and search ‘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 this check, please tell the officer that’s contacted you. We’ll help you in whatever way we can. For more details, go to www.gov.uk/get-help-hmrc-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.

When we may charge you a penalty for an inaccuracy

We may charge you a penalty if you send us a return that contains an inaccuracy, and the inaccuracy:

• results in the disallowed amount being understated or the reactivation cap being overstated for the period of account
• was careless, deliberate or deliberate and concealed (we refer to these as ‘behaviours’ which are explained later in this factsheet)

If you ask someone else, such as an employee or adviser, to do something on your behalf, you must do as much as you can to make sure that an inaccuracy does not occur. If you do not do this, we may charge you a penalty.

When we will not charge you a penalty for an inaccuracy

We’ll not charge you a penalty for an inaccuracy if you took reasonable care to get things right but your return was still wrong. Some of the ways you can show that you took reasonable care include:

• keeping accurate records
• checking with a tax adviser or with us if you’re not sure about anything

Disclosing an inaccuracy before we find it

If you tell us about an inaccuracy before you’ve any reason to believe that we’re about to find it, we call this an ‘unprompted disclosure’. If you tell us about an inaccuracy at any other time, we call it a ‘prompted disclosure’. Once we’ve started a check, a disclosure can only be unprompted if, exceptionally:

• it’s about an unrelated inaccuracy
• you had no reason to believe that we could have found it during our check

The minimum penalty for an unprompted disclosure is lower than the minimum penalty for a prompted one.

If you send us a return that you believe is correct and you later find that it contains a careless inaccuracy, we may be able to reduce the penalty to nil if you make an unprompted disclosure.

What you can do to reduce any penalty we may charge

We can reduce the amount of any penalty we charge you depending on our view of how much assistance you gave us. We refer to this assistance as the ‘quality of disclosure’ or as ‘telling, helping and giving’.

Examples of how you can make a disclosure include:

• telling us about, or agreeing that there’s something wrong and how and why it happened
• telling us everything you can about the extent of what is wrong as soon as you know about it
• telling and helping us by answering our questions in full
• helping us to understand your accounts or records
• helping us by replying to our letters quickly
• helping us by agreeing to attend any meetings, or visits at a mutually convenient time
• helping us by checking your own records to identify the extent of the inaccuracy
• helping us by using your private records to identify sales or income not included in your tax return
• giving us access to documents we’ve asked for without unnecessary delay
• giving us access to documents we may not know about, as well as those that we ask to see

We’ll reduce the penalty by the maximum amount possible if you:

• tell us everything you can about any inaccuracy as soon as you know about it or you believe we’re about to find it
• do everything you can to help us correct it

If you delay in making a disclosure, you may still be entitled to a reduction but it will be smaller. If we do not need any extra assistance from you, we’ll give you some reduction for telling, helping and giving.

Letting us know about any special circumstances

If there are any special circumstances that you believe the officer dealing with the check should take into consideration when calculating the penalty, you should let them know straightaway.

In particular, you should let the officer know if you believe that the amount of notional tax is greater than the actual loss of tax (we explain what we mean by ‘notional tax’ below). In such circumstances, a special reduction may be applicable.

How we work out the amount of a penalty

There are 8 stages in working out the amount of any penalty. Each stage is explained in more detail below.

1 Working out the amount of the notional tax

The penalty is a percentage of what we call the ‘notional tax’. Notional tax is the amount that arises as a result of correcting an inaccuracy in a return. The officer dealing with the check will explain how this is worked out. If you need to know more, please ask the officer dealing with the check.

2 Determining our view of the ‘behaviour’

When there’s an inaccuracy, we’ll work with you to find out what caused it. We refer to this as the ‘behaviour’. The type of behaviour will affect whether we charge a penalty and the amount of the penalty. There are 4 different types of behaviour.

Reasonable care

Everyone has a responsibility to take reasonable care over their tax affairs. What ‘reasonable care’ is will depend on each customer’s abilities and circumstances.

If there was anything about your health or personal circumstances that made it difficult for you to take reasonable care, please tell the officer who is carrying out the check. Telling them will mean that they can take this into account when considering whether you took reasonable care.

If you took reasonable care to get things right but your return or document still contained an inaccuracy, we will not charge you a penalty.

Some of the ways you can take reasonable care include:

• keeping enough records to make accurate tax returns
• checking the guidance in the Corporate Finance Manual — go to www.gov.uk and search for ‘Corporate Finance Manual’
• asking us or a tax adviser if you’re not sure about anything and following any advice given

Careless

This is where you failed to take reasonable care to get things right.

Deliberate

This is where you knew that a return was inaccurate when you sent it to us. Examples of deliberate inaccuracies include deliberately:

• overstating your tax-interest income
• not making relevant adjustments in calculating tax-EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) or group-EBITDA

Deliberate and concealed inaccuracies

This is where you knew that a return was inaccurate and you took active steps to hide the inaccuracy from us, either before or after you sent it to us. An example of taking active steps to conceal an inaccuracy is where you supply false evidence to support a non-existent interest receipt.

3 Deciding whether the disclosure was unprompted or prompted

This determines the minimum penalty percentage that we can charge. This is explained in more detail in the section of this factsheet titled ‘Disclosing an inaccuracy before we find it’.

4 Deciding the range that the penalty falls within

The penalty percentage falls into one of 6 ranges. The range it falls into depends on the type of behaviour and whether it was a ‘prompted’ or ‘unprompted’ disclosure. The following table shows the 6 penalty ranges.

Type of behaviour	Unprompted disclosure	Prompted disclosure
Reasonable care	No penalty	No penalty
Careless	0% to 30%	15% to 30%
Deliberate	20% to 70%	35% to 70%
Deliberate and concealed	30% to 100%	30% to 100%

5 Working out the reductions for the quality of disclosure (also referred to as ‘telling, helping and giving’)

The reduction we give depends on how much assistance you give us. For:

• telling we give up to 30%
• helping we give up to 40%
• giving access to records we give up to 30%

When we work out the quality of disclosure, we’ll also consider how long it’s taken you to disclose the inaccuracy. If it’s taken you a long time, (such as 3 years or more), to make a disclosure, we’ll usually restrict the maximum reduction we give for the quality of disclosure to 10 percentage points above the minimum of the penalty range. This means you will not benefit from the lowest penalty percentage that’s normally available.

6 Working out the penalty percentage rate

The penalty percentage rate is determined by the penalty range and the reduction for the quality of disclosure.

Example

We found a careless inaccuracy that the customer had not told us about before we started our check. When we told them about the inaccuracy, they agreed with us. This was a prompted disclosure.

The penalty range for a careless inaccuracy with a prompted disclosure is 15% to 30% of the notional tax.

The reduction for quality of disclosure (telling, helping and giving) was 70%.

Steps	Calculation example
To work out the penalty percentage rate, we first work out the difference between the minimum and maximum penalty percentages.	30% minus 15% = 15
We then take off the percentage reduction from the maximum penalty percentage we can charge.	15 × 70% = 10.5%
This gives us the penalty percentage rate.	30% minus 10.5% = 19.5%

7 Working out the amount of the penalty

To work out the amount of the penalty, we multiply the notional tax by the penalty percentage rate. For example, if the notional tax in the example above was £3,000, and there were no other reductions, the penalty would be £585 (£3,000 × 19.5% = £585).

8 Considering other reductions

After working out the amount of the penalty, we then take into account any other reductions that are necessary. For example, where the notional tax is significantly greater than the actual loss of tax, perhaps because other reliefs are available. If you think that this applies in your case, please tell the officer dealing with the check.

How we tell you about a penalty

We’ll write to you to tell you how much the penalty is and how we’ve worked it out. If there’s anything about the penalty that you do not agree with, or if you think there’s any information we have not already taken into account, you should tell us straightaway.

After taking account of anything you’ve told us, we’ll then either:

• send you a penalty assessment notice
• invite you to enter into a contract with us to pay the penalty, together with the tax and interest

In certain circumstances, you may also have to pay interest on the penalty if you do not pay it on time.

When an inaccuracy in an interest restriction return is due to information supplied by another company

In certain circumstances, a company that is not the reporting company may also be liable to a penalty. This will only apply if the reporting company has submitted an interest restriction return that contains an inaccuracy, and the inaccuracy:

• results in the disallowed amount being understated and/or the interest reactivation cap being overstated
• was due to another company deliberately supplying false information to the reporting company or withholding information from the reporting company

In these cases, the other company will be liable to a penalty equal to the amount of the notional tax. This will apply whether or not the reporting company is also charged a penalty.

If you’ve deliberately done something wrong

We may carry out a criminal investigation with a view to prosecution if you’ve deliberately done something wrong, such as:

• given us information that you know is not true, whether verbally or in a document
• dishonestly misrepresented how much tax you owe, or claimed payments you’re not entitled to

Managing serious defaulters

If you deliberately got your tax affairs wrong, and we find this during the check, we may monitor your tax affairs more closely. We have an enhanced monitoring programme called ‘Compliance Monitoring Programme’. For more information, read factsheet CC/FS14, ‘Compliance Monitoring Programme’. Go to www.gov.uk and search for ‘CC/FS14’.

Publishing details of deliberate defaulters

We may publish your details if you deliberately got your tax affairs wrong, but we will not do this if we’ve given you the maximum penalty reduction. For more information, read factsheet CC/FS13, ‘Publishing details of deliberate defaulters’. Go to www.gov.uk and search for ‘CC/FS13’.

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 particular 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, read factsheets:

• HMRC1, ‘HM Revenue and Customs decisions — what you can do if you disagree’
• CC/FS21, ‘Alternative Dispute Resolution’

Go to www.gov.uk and search for ‘HMRC1’ or ‘CC/FS21’.

Your rights when we’re 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’ve the right not to answer them — the amount of help that you give us when we are 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’ve the right to ask for both appeals to be considered together
• you’ve 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’. Go to www.gov.uk and search ‘CC/FS9’.

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. Go to www.gov.uk and search for ‘HMRC Privacy Notice’.