CH122060 - Offshore matters: asset-based penalties: circumstances when an asset-based penalty is chargeable - example

Mr E's 2020-21 income tax self-assessment return was the subject of an HMRC enquiry. The caseworker established that Mr E deliberately omitted the following taxable receipts from his ITSA return

  • £20,000 rental income from property in Dubai
  • £94,000 Capital Gain from disposal of an apartment in Dubai (Sold for £1,500,000)

The caseworker calculated the potential lost revenue (PLR) in relation to the above omissions is

  • £26,000 CGT
  • £9,000 IT
  • £35,000 Total PLR

Mr E has been charged a deliberate penalty (the Standard Offshore Tax Penalty) under Schedule 24 Finance Act 2007 for his inaccurate 2020-21 ITSA return.

You should consider whether an asset-based penalty is due

  • Mr E made inaccuracies in his tax return involving an offshore matter by omitting the rental income and capital gain from the sale of the Dubai apartment
  • Mr E’s behaviour that led to the inaccuracies was deliberate
  • Mr E has been charged a standard offshore tax penalty in respect of the inaccuracies under Schedule 24 FA 2007 for 2020-21
  • The income and gain that relate to the inaccuracies have a clear link to the underlying asset, the Dubai apartment
  • The tax at stake is (or includes) capital gains tax and asset-based income tax, see CH122110
  • The potential lost revenue of £35,000 exceeds the £25,000 threshold

Therefore, you can charge Mr E with an asset-based penalty under Schedule 22 Finance Act 2016.

You must identify the principal tax at stake relating to the asset. If the standard offshore tax penalty (or penalties) relates to more than one type of tax, the principal tax at stake is the tax which gives rise to the highest offshore PLR value.

With PLR of £26,000 the principal tax is capital gains tax. Income tax is the lower tax at £9,000.

In cases where the principal tax at stake is capital gains tax, the asset is the disposal on which the capital gains tax to which the standard offshore penalty was charged. The value of the asset is the total consideration for the disposal of the asset that had been used in calculating the taxable gain under TCGA 1992.

Therefore, the total consideration is £1,500,000 which was the sale proceeds of the Dubai property.

The standard amount of the asset-based penalty is the lower of

  • 10% of the value of the asset, or
  • offshore potential lost revenue (PLR) multiplied by 10

Value of the asset £1,500,000 x 10% = £150,000

Offshore PLR £35,000 x 10 = £350,000

Therefore, the standard amount of the asset-based penalty is £150,000.

The standard amount of the asset-based penalty, £150,000 is the amount before the caseworker makes any reductions for disclosure and co-operation (and special reduction, if appropriate).

FA16/Sch22 penalties should be recorded and authorised on the National Penalty Processing System, see CH407500.