EM6062 - Contract Settlements: Penalties: Abatement - Two or More Tax Geared Penalties
The guidance about contract settlements at EM6000+ only relates to direct tax. You must never include VAT or VAT penalties in a contract settlement.
This guidance does not apply to penalties for inaccuracies in returns or other documents with a filing date on or after 1 April 2009 where the return or document relates to a tax period beginning on or after 1 April 2008. Refer to the Compliance Handbook at CH82000+ for help with these penalties.
Section 97A (and its CT equivalent in FA98/SCH18) ensure that when two or more tax geared penalties are chargeable on the same tax the aggregate penalty does not exceed the greater or greatest of the penalties.
For example, this could arise where
- there is a failure to notify, and
- accounts are sent in which understate the profits for the same year.
There could be
- a TMA70/S7 penalty based on the full amount of the tax on that source, and
- a TMA70/S95 penalty based on the ‘tax difference’ between the correct and returned profits.
The penalty will be restricted.
Example
A trader notifies their chargeability for 2002-03 in July 2004.
They submit their accounts in September 2004 showing a tax liability of £10,000.
After a S9A enquiry the true liability is found to be £15,000.
The maximum Section 7 penalty is |
£15,000 |
The maximum Section 95 penalty is |
£5,000 |
Totalling |
£20,000 |
Section 97A would operate to reduce this by the amount of the penalty on the 'difference' of £5,000 so that the maximum statutory penalty would be £15,000.
Section 97A is aimed at defining the maximum penalty where there are two or more tax-geared penalties based on the same tax. In practice it is not desired to take a reduced penalty on the same tax more than once.
You should therefore
- exclude from your calculation any tax which has already been taken into account for penalties
- apply the appropriate abatements to the culpable tax for each offence
- take the tax attracting the higher or highest penalty first.
In the example above, if it is decided that the penalty loadings are 10% for the Section 7 offence and 30% for the Section 95 offence the penalty calculation will be
Section 95 |
Tax difference £5,000 @ 30% |
£1,500 |
|
Section 7 |
Tax for year |
£15,000 |
|
Less Section 95 penalty |
£ 5,000 |
||
£10,000 @10% |
£1,000 |
||
Penalty |
£2,500 |