EM5213 - Penalties: formal assessments and determinations: means

You must normally treat penalties in the same way as any tax or interest that is due. This principle applies whether a penalty is being assessed or is being included in a contract settlement.

The only situation in which you may consider not charging a penalty is when you have strong evidence to indicate that the person will not be able to pay it, but you must follow the guidance below for the exact circumstances in which you can do this.

The guidance below explains the slightly different approach to the consideration of means for direct and indirect tax cases.

Direct tax cases
Cross tax cases involving indirect tax

Direct tax cases

For direct tax cases it is normally best practice to consider the person’s ability to pay before you determine or assess penalties. This applies to all tax-geared penalties, but you must bear in mind that penalties under FA07/Sch 24 and FA08/Sch41 have a statutory minimum penalty.

It is not normally cost effective to assess or determine penalties if there is no possibility of the money being paid. This is because any penalty would not be an effective sanction and we would be incurring unnecessary administration costs in the process.

However, for all direct tax cases you must charge a penalty if one or both of the following two conditions applies.

The first condition applies where

  • the penalty under consideration is a result of either deliberate, or deliberate and concealed, behaviour, and
  • the Potential Lost Revenue (PLR) is £25,000 or more

Assessing the penalty under these circumstances will ensure that, even when the person cannot pay the penalty, Managing Serious Defaulters (MSD) and Publishing Details of Deliberate Defaulters (PDDD) can come into force as effective sanctions.

The second condition applies if

  • you have considered all possible funding options, and
  • you do not have sufficient evidence that the person will not be able to pay all or part of the penalty.

If one or both of these conditions apply, you must seek authorisation to assess or determine the penalty in the normal way.

You will need strong evidence if you decide that the person will not be able to pay all or part of the penalty. Remember that ability to pay is much broader than ready cash. You need to examine all assets and liabilities following the guidance at EM6214 and EM6215. In particular, if the person is continuing in business, it is very unlikely that you will decide that they will not be able to pay.

When you are considering means it may be that lack of co-operation leaves you short of information. But one good pointer is to see how Debt Management and Banking (DMB) colleagues are progressing with collecting any tax, NICs or other amounts that have been formally charged, and the consequent interest. You should liaise with them and report progress on recovery in your submission. If you still have insufficient information you should explain this in your report, see below.

If you decide to assess or determine the penalty because one or both conditions apply you must send a report about the person’s means to DMB on form MS134 in SEES and email to Worcester DMB Enquiries, 1 (DM) so that they can decide whether enforcement is appropriate. 

You can only decide not to charge the penalty if neither of these two conditions above applies.

That is, you can only decide that you will not charge a direct tax penalty when

  • there is evidence that the person will not be able to pay all or part of the penalty, and
  • for any penalty arising from deliberate or deliberate and concealed behaviour, the PLR is less than £25,000.

If after following the guidance you decide that it is appropriate not to charge a penalty, you must seek authorisation for your decision and include a narrative report about the person’s means in your submission to the Authorising Officer. You should record this information in a NPPS penalty case or in your AO Report Form, see EM5206. If you don't have sufficient space, you will need to submit a separate report.

Cross tax cases involving indirect tax

The guidance in this manual is specifically for direct tax caseworkers. You may, however, be concluding a compliance check that involves both direct and indirect tax liabilities, for example VAT. This includes cases you have worked jointly with an indirect tax compliance caseworker. So you will need to know how to consider means when setting any indirect tax liabilities or penalties.

It is normally more cost effective in indirect cases to simply assess the penalty and allow DMB to consider means at a later stage. Where you hold any details about the person’s means, send a report to DMB. You must also record the details in the “other details” page of the PDAC, see CH407200 or in Caseflow.

If, however, the trader is de-registered and you have evidence to suggest that the person cannot pay a tax geared penalty under FA07/Sch24 or FA08/Sch41 for careless or non-deliberate behaviour, you must contact DMB before you assess the penalty. They may advise you that, based on the evidence, it is not cost-effective to assess the penalty.

If the underlying behaviour is deliberate, you can only consider not charging a penalty if the PLR is less than £25,000.

The rules for misdeclaration penalties are different and are at VCP10755.