RSTP3014 - Calculating potential lost revenue

RSTPA guidance on the rules relating to the calculation of potential lost revenue in respect of penalties in RSTP3011, RSTP3012 and RSTP3013.

Potential lost revenue: normal rule

The normal rule for potential lost revenue (‘PLR’) is that it is the additional amount due and payable to us as a result of:

  • correcting an inaccuracy in a document, including an inaccuracy attributable to another person;
  • failing to tell us about an under-determination or under-assessment;
  • an inaccurate repayment or credit having been made by us  as a result of the inaccuracy; or
  • a repayment or credit that would have been incorrectly made by us if the inaccuracy had not been corrected.

When determining the PLR for the purposes of calculating the amount of a penalty, the PLR itself may be subject to recovery or retention by a procedure such as a Revenue Scotland assessment (see RSTP1008) or us formally refusing a claim.

An inaccuracy can affect the tax due in more than one tax period. The additional amount of tax due as a result of putting right an inaccuracy includes any tax effect from that inaccuracy that arises in later or earlier tax periods.

Inaccuracies in other documents that have been given to us for the same transaction or period will be considered separately in terms of calculating penalty amounts.

Example 1

Francis purchases a house and submits an LBTT return for the transaction, the result of which is that Francis pays £5,000 in LBTT. Following a compliance check it was agreed that Francis had made a careless inaccuracy in completing the LBTT return. As a result of correcting the inaccuracy, Francis’ LBTT liability is now £8,000.

The PLR is £3,000 (£8,000- £5,000).

Example 2

Lee puts in a repayment claim of £3,000 to recover an amount of LBTT which he had overpaid. We process his claim and repay the £3,000. After the repayment, a compliance check reveals that as the result of a careless inaccuracy he has claimed for an amount which is not recoverable. As a result of correcting the inaccuracy, Lee’s claim is reduced to £1,400.

The PLR is £1,600 (£3,000- £1,400).

RSTPA 2014 section 187

Potential lost revenue: multiple errors

If you are liable to more than one penalty under section 182 of the RSTPA 2014 (see RSTP3011) in respect of more than one inaccuracy in the same document, the order in which the inaccuracies are corrected may affect the amount of PLR. Where this is the case, careless inaccuracies are to be taken to be corrected before deliberate inaccuracies.

If you are liable to a penalty under section 182 of the RSTPA 2014 in respect of one or more understatements in one or more documents relating to a tax period, in calculating the PLR we will take account of any overstatement in any document you have given us in relation to the same tax period.

Where this is the case, overstatements are to be set against understatements in the following order:

  • understatements in relation to which you are not liable to a penalty;
  • careless understatements; and
  • deliberate understatements.

‘Understatement’ in this case means an inaccuracy that amounts to, or leads to:

  • an understatement of a tax liability;
  • a false or inflated statement of a loss, exemption or relief; or
  • a false or inflated claim for relief or to repayment to tax.

‘Overstatement’ in this case means an inaccuracy which is not an understatement. In other words, it is an inaccuracy which does not amount to, or lead to, any of the above results.

Where the PLR is for delayed tax inaccuracies (see the ‘Potential lost revenue: delayed tax’ heading further below), the overstatement element of the delayed tax inaccuracy is not available to be set against any understatements for the same period.

If the overall effect of the overstatements and understatements is that the tax liability is overstated when the document was submitted, there will be no PLR.

In calculating PLR for the purposes of a penalty under section 182 of the RSTPA 2014, no account is to be taken of the fact that a PLR from you (the person who gave us the document containing the inaccuracy) is or may be balanced by a potential over-payment by another person (except to the extent that legislation requires or permits another person’s tax liability to be adjusted by reference to your tax liability).

Inaccuracies in other documents that have been given to us for the same transaction or period will be considered separately in terms of calculating penalty amounts.

RSTPA 2014 section 188

Potential lost revenue: losses

Where an inaccuracy has the result that a loss is wrongly recorded for the purposes of a devolved tax, and the loss has been wholly used to reduce the amount of tax which is due and payable by you, the PLR is calculated in accordance with the ‘normal rule’ (see the first heading further above).

Where an inaccuracy has the result that a loss is wrongly recorded for the purposes of a devolved tax, and either all or part of the wrongly recorded loss has not yet been used to reduce the amount of tax which is due and payable by you (and so the tax effect is not yet known), the PLR is:

  • (1) the PLR calculated in accordance with the ‘normal rule’ (see the first heading further above) in respect of any part of the loss (if any) that has been used to reduce the amount of tax which is due and payable by you, plus
  • (2) a discounted rate of 10% (the discounted rate) of the unused loss. The discounted rate recognises uncertainty about the current tax value of the loss when it is eventually used to reduce your tax liability.

Both of the above rules (a loss being wholly or not wholly used to reduce the amount of tax due and payable) apply both to:

  • a case where no loss would have been recorded but for the inaccuracy; and
  • to a case where a loss of a different amount would have been recorded – in this case, both of the above rules apply only to the difference between the amount recorded and the true amount.

Finally, the PLR in respect of a loss in any case is nil where, because of either the nature of the loss or your circumstances, there is no reasonable prospect of the loss being used in the future to support a claim to reduce the tax liability of any person.

Whether or not there is a reasonable prospect of any such loss being used depends on the nature of the loss and your circumstances. In determining whether or not there is a reasonable prospect, we will consider if there is a legal or factual reason which means that the loss can never be used. If the answer to this is ‘yes’, then the PLR for that loss is nil.

RSTPA 2014 section 189

Potential lost revenue: delayed tax

Where an inaccuracy (a ‘delayed tax inaccuracy’) results in an amount of tax (‘the delayed tax’) being declared to us later than it should have been, the PLR is:

  • 5% of the delayed tax for each year of the delay; or
  • a percentage of the delayed tax, for each separate period of delay of less than a year, equating to 5% per year.

This rule (the ‘delayed tax rule’) applies instead of the normal rules for calculating the PLR, but it does not apply to a case which falls under the ‘Potential lost revenue: losses’ heading above (i.e. a wrongly recorded loss).

The delayed tax rule covers cases where the delayed tax inaccuracy only has a timing effect so that, comparing an earlier period with a later one, there is no overall loss of tax (assuming the same rate of tax applies to both periods). The rule also covers situations where an over-claim in one period is matched by an under-claim in a later period.

In other words, for the delayed tax rule to apply a delayed tax inaccuracy always has two elements in different tax periods (one understatement and one overstatement) - even if a return for one period (that would contain the overstatement) is not yet due to be filed. Both elements of the delayed tax inaccuracy fall under the delayed tax rule, so the multiple inaccuracy rules (see the previous heading) do not apply to either the understatement or overstatement element of the delayed tax inaccuracy. 

If the later return has not yet been filed, we need to decide whether the reversal would have taken place without you doing anything if the inaccuracy had not been discovered. If we are satisfied that it would have been automatically corrected (for example by your accounting system) then the delayed tax rule applies.

Example 1 (understatement in one return followed by overstatement in later return):

Francis had an accounting system problem which resulted in a landfill invoice dated 10 June 2015 being incorrectly allocated to his second quarterly return (covering the 01/07/15 to 30/09/15 period) rather than the return covering the first quarterly period (01/04/15 to 30/06/15) period. As a result of the accounting problem, £10,000 of SLfT was omitted from the first quarterly return and included instead on the second quarterly return without Francis taking any remedial action.

During a compliance check in November 2015, we discover the £10,000 omitted from the first quarterly return and included in the second quarterly return. Francis accepts that he had failed to take reasonable care by not maintaining an adequate accounting system.

SLfT of £10,000 has been declared later than it should have been. The inaccuracy was reversed in a later return without Francis having to do anything. We are satisfied that the inaccuracy has both an understatement and an overstatement and is therefore a delayed tax inaccuracy.

The PLR is therefore calculated using the delayed tax rules. The delay here is three months (the period between the filing dates for the two returns) so the PLR for the penalty is 3/12 of 5% of the delayed tax inaccuracy.

The PLR is: £10,000 x 5% x 3/12 = £125

Example 2 (claim made prematurely):

Lauren, a landfill operator, claimed £3,000 credit for SLfT in her tax return for the second quarterly return period (01/07/15 to 30/09/15), when she should have claimed it in her return for the third quarterly period (01/10/15 to 31/12/15) period.

During compliance checks in November 2015 we discover this careless inaccuracy in Lauren’s second quarterly return. At this point her third quarterly return is not yet due.

In our view, Lauren’s accounting systems would not have claimed the amount of credit again in the third quarterly return, so the PLR for the penalty is calculated using the delayed tax rules.  The delay here is three months (the period between the filing dates for the two returns) so the PLR for the penalty is 3/12 of 5% of the delayed tax inaccuracy.

The PLR is: £3,000 x 5% x 3/12 = £37.50

RSTPA 2014 section 190

Ref ID: 
RSTP3014
Archive Date: 
15 March 2015
Last updated: 
15 March 2015
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