Penalties
The bottom line with this page is that on conclusion of an investigation HMRC often try to charge a penalty when they have no right to do so - AS OF JUNE 2008 this is becoming more prevalent.
Penalties can apply for various reasons. It could be that your return is late - in which case in order to avoid the penalty you will have to show that you had a reasonable excuse for not sending in the return on time and that the return was then submitted without undue delay. These penalties are, in the scheme of things, unlikely to be significant. What can be significant, however, is the amount of the penalty charged if you are investigated by HMRC and extra tax is due to be paid as a result. The maximum amount of the penalty is, under normal circumstances 100% - that is the amount of tax again, however, this is always reduced to take into account the levels of declaration, cooperation and seriousness. This all depends on each individual case - what I want to concentrate on here is whether HMRC are right to charge a penalty in the first place. Penalties are chargeable if the individual is guilty of fraud or negligence. Now if you are involved in fraudulent activities then you deserve to be penalised (and the maximum penalty for fraud is 200%) - accusations of fraud are relatively rare in HMRC investigations - what is more common is negligence. Negligence is not doing what a prudent man would do - a man being the man in street - the man on the "Clapham omnibus". It is generally accepted that the man in the street is aware that he has to pay tax, that he has to complete a tax return but it is perhaps not expected that the man in the street understands the finer points of law. Compare the two following examples :-
1 A man is site based and travels 10 miles return every day in transport provided by his employer. He completes his tax return and claims travelling expenses on the basis that he uses his own car and travels 30 miles return every day - as a consequence he receives a repayment. It has to be accepted that he has been negligent and a penalty will be appropriate.
2 A man claims legitimate travel expenses of £50. On his tax return he enters the amount as £50.00 and HMRC on processing the return misread this as £5000. He is a 40% taxpayer and as a result he receives an unexpected repayment of £2000. If he keeps quiet and accepts the cheque without query HMRC will consider this to be negligent.
3 A man is site based and claims "legitimate" travel expenses on his self assessment return. He travelled to the same site all year - on investigation HMRC discover that during the previous 24 months the claimant had spent, in 4 separate visits, 6 months at that site. Without boring you will the legalities part of the claim fails on a point of law. The man on the Clapham omnibus could not be expected to understand this piece of legislation - the claimant has not been negligent and therefore no penalty applies.
4 A person is represented by an agent who deals with a claim based on a complicated point of law. HMRC successfully challenge the claim before the Commissioners and as a result the taxpayer has to refund £5000. Where a complicated point of law is at stake a prudent person would seek professional advice - the taxpayer has not been negligent - no penalty.
5 A taxpayer has an agent who completes his return for him. Inadvertently the agent overlooks sending in details of the let property. The taxpayer does not look at the return - he simply signs it without looking - he has been negligent - HMRC expect that a prudent individual would examine the tax return before signing. A penalty applies.
6 A taxpayer lies to his agent - a penalty will apply.