If you are charged a penalty

This page is about a penalty the tax authority has charged on the company whose name is on the claim. It arrives with a notice, a figure and a date. What the company owes is decided by the law of your country; what, if anything, you can recover from the adviser is decided by your engagement letter; and what you should do first is take advice, because the notice will have a deadline and the way you respond can change the outcome.

What the company owes

The repayment, the interest where it applies and any penalty usually fall on the business, not on whoever prepared the claim.1Source 1The business repays a reduced claim, with interest and penalties where they apply: IRS, "Interest" and "Accuracy-related penalty" (United States); HMRC, "Tell HMRC if you've claimed too much R&D tax relief" (United Kingdom); Revenue, Tax and Duty Manual Part 29-02-06, "R&D tax credit: clawback of relief" (Ireland); Income Tax Act section 161(1) and CRA, "Avoiding penalties" (Canada); Department of Industry, Science and Resources, "Decisions we make about R&D Tax Incentive applications" (Australia); Inland Revenue, "Interest on overpayments and underpayments" and "Shortfall penalties" (New Zealand); IRAS, "Penalties for errors in tax returns" (Singapore). Rules under which a preparer or agent can be penalised alongside the business: IRS, "Tax preparer penalties" (United States); HMRC, Compliance Handbook CH81166 (United Kingdom); Revenue, Notes for Guidance, TCA 1997 Part 47, section 1055 (Ireland); Income Tax Act section 162(5.1) to (5.3) and CRA, IC01-1R2 "Third-party civil penalties" (Canada); Tax Agent Services Act 2009, sections 30-10 and 30-15 (Australia); Inland Revenue, "Shortfall penalties" (New Zealand); Income Tax Act 1947 section 95 (Singapore). More detail on your country page. How a penalty is calculated, and whether it can be reduced or reconsidered, differs by country and can depend on how the error arose. Each tax authority publishes how its penalties are decided, and the page for your country links to it. Any reply or appeal will have a deadline, which is the first reason to take advice as soon as the notice arrives.

What your contract may let you recover

Three clauses matter. The liability and indemnity clause is where a letter says whether penalties are inside or outside the adviser's liability, and what cap applies to anything you can recover. The fee refund clause says whether the fee comes down with the claim. The review and audit support clause says whether the adviser helps with the penalty process at all. Whether a clause that excludes penalties would hold in your situation is a question for a lawyer in your country; this page does not say that any clause is or is not effective.

In some countries the person who prepared a claim can face a penalty of their own.2Source 2Rules under which a preparer or agent can be penalised alongside the business: IRS, "Tax preparer penalties" (United States); HMRC, Compliance Handbook CH81166 (United Kingdom); Revenue, Notes for Guidance, TCA 1997 Part 47, section 1055 (Ireland); Income Tax Act section 162(5.1) to (5.3) and CRA, IC01-1R2 "Third-party civil penalties" (Canada); Tax Agent Services Act 2009, sections 30-10 and 30-15 (Australia); Inland Revenue, "Shortfall penalties" (New Zealand); Income Tax Act 1947 section 95 (Singapore). More detail on your country page. That is a matter between the tax authority and the preparer. It does not move the company's penalty, and it is not something this page can tell you how to pursue.

What to do first

1. Note the deadline on the notice, and take advice before you respond to it or to the adviser.
2. Gather the file: the notice, the claim as filed, the working papers, the engagement letter and the correspondence.
3. Write to the adviser. Ask for their account of how the error arose, for the working papers you do not have, and for their reading of the letter on liability and on the fee. Keep it plain and keep it polite.
4. Do not withhold any fee without advice. A penalty and a fee are separate questions, and the fee disputes page explains why mixing them makes both harder.
5. If the conduct of the adviser, rather than the money, is the problem, the complaints page describes the route.

Read next

• Claim reduced on review and correcting a claim
• Myth: the adviser is responsible if it goes wrong
• The clause: liability and indemnity. Getting independent advice

Sources

1. The business repays a reduced claim, with interest and penalties where they apply: IRS, "Interest" and "Accuracy-related penalty" (United States); HMRC, "Tell HMRC if you've claimed too much R&D tax relief" (United Kingdom); Revenue, Tax and Duty Manual Part 29-02-06, "R&D tax credit: clawback of relief" (Ireland); Income Tax Act section 161(1) and CRA, "Avoiding penalties" (Canada); Department of Industry, Science and Resources, "Decisions we make about R&D Tax Incentive applications" (Australia); Inland Revenue, "Interest on overpayments and underpayments" and "Shortfall penalties" (New Zealand); IRAS, "Penalties for errors in tax returns" (Singapore). Rules under which a preparer or agent can be penalised alongside the business: IRS, "Tax preparer penalties" (United States); HMRC, Compliance Handbook CH81166 (United Kingdom); Revenue, Notes for Guidance, TCA 1997 Part 47, section 1055 (Ireland); Income Tax Act section 162(5.1) to (5.3) and CRA, IC01-1R2 "Third-party civil penalties" (Canada); Tax Agent Services Act 2009, sections 30-10 and 30-15 (Australia); Inland Revenue, "Shortfall penalties" (New Zealand); Income Tax Act 1947 section 95 (Singapore). More detail on your country page.  Back
2. Rules under which a preparer or agent can be penalised alongside the business: IRS, "Tax preparer penalties" (United States); HMRC, Compliance Handbook CH81166 (United Kingdom); Revenue, Notes for Guidance, TCA 1997 Part 47, section 1055 (Ireland); Income Tax Act section 162(5.1) to (5.3) and CRA, IC01-1R2 "Third-party civil penalties" (Canada); Tax Agent Services Act 2009, sections 30-10 and 30-15 (Australia); Inland Revenue, "Shortfall penalties" (New Zealand); Income Tax Act 1947 section 95 (Singapore). More detail on your country page.  Back