EM6080 - Contract Settlements: Penalties: Abatement - Seriousness

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.

The abatement in respect of the seriousness of the offence is not concerned with what happens during the enquiry (unless irregularities continue while it is going on). It requires an appraisal of all the circumstances that have resulted in a loss of tax and NIC under two sub-headings which are inter-related, that is, size and gravity.

Size

‘Size’ will be both absolute and relative in any case. The offence of a well-to-do trader who extracts £10,000 a year, representing only a relatively small proportion of the true profits of the business, is serious because of the magnitude of the omissions. That of a customer of more modest means, whose omissions are considerably less but amount to as much as a third or a half of his true profits, is also serious.

Size (or relative size) will be taken into account as a constituent of the abatement. It is a useful pointer to the seriousness of an offence, just as it may of itself be conclusive of culpability.

For example, where profits have been proved to be reasonably substantial, it is not usually difficult to refute a customer's excuse that he did not notify chargeability because he thought he was not liable. Similarly, the customer's motives for failing to send in a complete return or provide accounts are frequently self-evident when the tax lost is computed (see, in this connection, Attorney-General v Johnston, 10TC at p763).

Gravity

‘Gravity’ means, broadly speaking the degree of culpability, ranging from a minor degree of negligence to a case of serious fraud with a variety of intermediate steps.

Overall Abatement for Seriousness

The abatement in cases in which fraud cannot be proved should not normally be less than 15 percent. The range of abatements for such cases must be taken as between 15 percent and 40 percent. The lower figure is reserved for the most serious cases in which culpability falls short of fraud, and the abatements for less serious cases scaled up accordingly within the range.

A more serious case of negligence only will, therefore, normally qualify for an abatement in the region of, but not less than, 15 percent. On the other hand, an offence which involves only a minor degree of negligence associated with muddle or confusion might, subject to size and circumstances, rate as much as 35 percent.

It will be rare for the full abatement of 40 percent to be given. Normally, the existence of some offence should be reflected in the abatement. There may, however, be the exceptional case. For example, omissions at a time when the customer was aged or infirm or there were other special circumstances which make it likely that penalty proceedings would be unsuccessful. It may then be appropriate to waive the penalty or include a nominal amount only.

The more serious fraud cases are dealt with by Specialist Investigations once the case has been reviewed by an Evasion Management Team (EMT) and will often rate abatements considerably below the 15 percent figure. In other cases where fraud can be established, an abatement not normally exceeding 15 percent, should be given. The amount should be determined in accordance with the circumstances of the case.

Where there has been a false certificate of disclosure or statement of assets and you are authorised to settle the case locally EM3820+ you should reduce the normal abatement for seriousness.

Where a person has taken a significant period to correct their non-compliance in relation to either an onshore or offshore matter, or they would previously have been able to make a disclosure through one of HMRC’s offshore disclosure facilities, they can no longer expect HMRC to give them the full abatement for disclosure. A ‘significant period‘ is normally considered to be over 3 years but may be less where the overall disclosure covers a longer period.

If you consider that this may apply to your case, see EM6070.