HM Revenue and Customs (HMRC) is able to give out all sorts of different penalties to your business if you fail to handle tax-related matters in the correct manner. For example, you can be issued a fine for making mistakes on documentation sent to HMRC, or paying the tax collection agency an insufficient amount.

In this article, we will take a look at the different types of penalty that can be handed out for errors in reporting and payment. After all, the best way to avoid the fines is to be aware of the consequences.

Inaccuracy Penalty

One type of penalty is known as the inaccuracy penalty. It applies when HMRC has made a mistake on how much tax you are liable to pay, but you do not let the agency know of this error.

An inaccuracy penalty can be given out for almost all taxes and duties, so ensure that you are being charged the correct amount for the scale of your business for each tax return.

Of course, you will also receive a fine for making mistakes on any documents sent to HMRC, even if they are accidental. The severity of the penalty depends on how and why the mistake happened. There are three tiers of financial punishment which HMRC can hand out.

The least severe is incurred if the mistake was made accidentally, and the circumstances surrounding the mistake were negligent and inattentive. This is referred to as a lack of reasonable care. An inaccuracy penalty for lack of reasonable care will have a monetary value of between 0% and 30% of the tax discrepancy. While the meaning of “reasonable care” depends on the size and finances of the company, there are a few rules of thumb that every business should follow.

These include keeping financial records that go back at least 5 years (so complete tax returns can be made) and making sure to understand the tax levels for all transactions that go through their business, researching any that they may be unfamiliar with. If there are any transactions that you are still unsure about, inform HMRC about your uncertainty so that they know you put the utmost care into the matter; HMRC may not issue a fine thereafter even if there is an error.

The fine will be larger if the error was made deliberately. The sending of the wrong information on purpose to HMRC will incur a penalty of between 20% and 70% of the extra tax due.

If the mistake in payment, report or paperwork was both deliberate and concealed, you can be fined between 30% and 100% of the tax amount that was intentionally hidden.

The penalty percentage can be lowered if you take the following steps:

  • Inform HMRC about the errors (before they find out)
  • Help HMRC to work out the extra tax amount due
  • Give HMRC access to the necessary financial documentation

Failure To Notify Penalty

Finally, you can get a fine for failing to let HMRC know of any changes to how much tax, VAT or duties that you have to pay. This is known as a failure to notify penalty.

Again, the size of the fine will depend on whether the mistake was non-deliberate, deliberate or deliberate and concealed. The fine is calculated as a percentage of potential lost revenue, at 30%, 70% and 100% respectively.

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