08/03/17

UK: HMRC issues guidance on tax avoidance penalties for partnerships

HMRC has published guidance on the penalty regime for partnerships which have used a tax avoidance scheme in circumstances where a partnership follower notice has been issued to the representative partner and they have not taken the necessary corrective action on time, reports CCH Daily. 

The guidance states that if HMRC has sent a partnership follower notice to the representative partner and they have not taken corrective action on time, HMRC will charge each of the relevant partners a penalty.

The total amount of the penalties for not taking corrective action is equal to 20% of the value of the denied advantage, and each relevant partner will be liable to their appropriate share of that total amount. The penalty percentage rate may be discounted for co-operation, but cannot be reduced below 4%.

HMRC will send a notice of penalty assessment to each relevant partner. The representative partner can appeal if any disagree with their notice.

There are deadlines for sending the notices. If the partnership follower notice relates to a compliance check, the latest day on which HMRC can send a notice of penalty assessment is 90 days from the date on which it is completed.

If the partnership follower notice relates to an appeal or a further appeal, the notice of penalty assessment must be issued 90 days from the earliest of the dates on which the representative partner took corrective action; the final ruling was made on the partnership’s appeal or further appeal; or the appeal or further appeal was abandoned or otherwise disposed of before it was determined by the court or tribunal.

There are four stages in working out the penalty percentage rate. The first involves identifying the penalty range, which is the difference between the maximum and minimum penalty percentages that HMRC can charge.

Secondly, HMRC will assess the ‘quality of cooperation’ in terms of the timing, nature and extent of the partners’ support in identifying and addressing any tax advantage. This is calculated with reference to specific activities, such as counteracting the denied advantage and giving access to tax records.

In the third stage, this calculation is applied to the maximum penalty percentage in order to work out any reduction. Finally, this reduction is applied to the final charge.

To work out the total amount of the penalties, HMRC multiplies the value of the denied advantage by the penalty percentage rate. Each relevant partner will be liable to their appropriate share of the total amount of penalties. The relevant partner’s appropriate share will be calculated by reference to the partnership’s profit sharing arrangements.

After working out the amount of the penalty for not taking corrective action on time, HMRC will look at each relevant partner separately to see whether they have incurred any other relevant penalties. If they have, HMRC will then consider whether to restrict the overall amount of penalties charged.

If relevant partners receive a penalty and fail to pay on time, they may be charged late payment interest on the amount of their penalty.

If HMRC charges the relevant partners a penalty because the representative partner did not take corrective action, only the representative partner will be able to appeal if any of the relevant partners disagree.

The representative partner can appeal against the total amount of the penalties the relevant partners have to pay. They can also appeal against the penalties if they believe that HMRC has failed to meet deadlines or other legal requirements, but they cannot appeal on the grounds that one or more of the partners disagrees with how their share of the penalty has been calculated.

The guidance includes a number of examples of how penalties are calculated.