What penalties apply for Errors in returns and documents? How are they calculated? When can they be reduced or suspended?

This is a freeview 'At a glance' guide to penalties for errors in returns and documents.

  • Subscribers click here for your version of this note which additionally summarises case law and provides guidance on how to appeal suspension conditions. 
  • There is also a VAT Penalty note for subscribers.

At a glance

A tax-geared penalty will apply in one of three circumstances that result in a potential loss of tax:

  1. When a taxpayer makes a careless error or mistake in a tax return or document.
  2. When a third party supplies false information, or deliberately withholds information in connection with another person’s return or document.
  3. When HMRC raises an assessment for tax and the taxpayer fails to notify HMRC that the assessment is too low.

The measures are set out in S97 and Sch 24 FA 2007.

Further amendments have followed:

  • S122 and Sch 40 FA 2008 amend the rules to apply to certain third parties.
  • S35 and Sch 10 FA 2010 increases the ranges of penalties in relation to the potential loss of offshore taxes.
  • S124 Finance (No 2) Act 2017 inserts provisions applying to errors that are related to avoidance arrangements.

When a taxpayer makes an error in a tax return or document i.e. an inaccuracy, and this amounts to, or leads to:

  • An understatement of their liability to tax
  • A false or inflated statement of a loss by them or
  • A false or inflated claim to repayment of tax

a penalty is charged per error.

  • Each error has to be looked at in isolation in order to determine its category and the behaviour that contributed to it.
  • There will only be a penalty if the error could have led to a potential loss of revenue.
  • Once evaluated, errors may be grouped to simplify calculation.

Penalties are tax-geared. From 1 April 2011, there are different penalty rates depending on whether the error relates to domestic or offshore income and gains.

The rate of penalty that will apply is determined according to the taxpayer’s underlying behaviour, as appraised at various stages between the time of the discovery of the error and its disclosure to HMRC. This may take several steps to calculate and will often require a detailed appraisal of the individual facts of each case combined with judgement as follows:

  • The first issue is to decide whether in making the error the taxpayer had been taking reasonable care over their tax affairs.
  • Where a taxpayer has made an error despite taking reasonable care it is treated as 'innocent' and no penalty is charged, subject to the new Finance (No.2) Act 2017 changes regarding errors related to avoidance arrangements.
  • Where a taxpayer is found not to have taken reasonable care, e.g. they have been negligent, any error will be treated as 'careless' and penalties will apply.
  • A higher range of penalties will apply if the taxpayer was found to have made the error deliberately or deliberately and had also made attempts to conceal it.
  • Having worked out the maximum penalty according to the taxpayer’s past behaviour, the minimum penalty is calculated on the basis of whether the taxpayer disclosed the error to HMRC or whether disclosure was prompted by HMRC.
  • The maximum penalty is then reduced by the taxpayer’s disclosure; whether they were helpful and cooperative in assisting HMRC to quantify and correct the error. 
  • When a penalty is charged under the provisions of s98 of the 1970 Taxes Management Act (TMA) no penalty is payable under Sch 24 FA 2007: any document that triggers a s98 penalty is automatically excluded from the list of documents for which penalties for inaccuracies may be charged.
  • There are special rules dealing with losses and where there is no loss of tax but liability is delayed.
  • There are special rules where the taxpayer used a tax avoidance scheme and reliance on a third party may or may not be a defence depending on context, see Penalties: errors in returns and documents (subscriber version).
  • A penalty may be charged where an agent has made an error, but only if the taxpayer is found not to have taken reasonable care.
  • Company officers may be assessed for penalties where an inaccuracy is made deliberately. The same applies in the case of an LLP and its members.
  • HMRC may suspend penalties under ‘careless’ behaviour for a set period.
  • The taxpayer may appeal the decision to set a penalty and the rate of penalties charged see How to Appeal a Tax Penalty.
  • The taxpayer may appeal any decision not to suspend a penalty or challenge suspension conditions, see Penalties: errors in returns and documents (subscriber version). 


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