TaxCalc Blog

HMRC Publishes Response to Penalties Consultation

Back in February of this year, HMRC kicked off a public consultation on the penalties it issues to taxpayers and the reasons why. It’s highly likely that the UK tax regime will become more automated in the coming years and with it, so too will be the application of penalties.

Computers need rules to apply. But what should the new rules look like?

Curiously, the document showed that HMRC wanted to make itself look more fair in how penalties were determined and applied, rather than the hard-and-fast approach taken today.

We participated in this through our affiliation with BASDA, the Business Application Software Developer Association.

We have long believed that our customers want to get their own, and in the case of practices, their clients’ tax affairs right and ensure payment of liabilities are made on time.

As such, we favoured an approach where an honest mistake or a one-off lateness would result in nothing more sinister than a tap on the wrist. Persistent offenders, however, should find themselves in increasingly higher levels of hot water.

Of course, we were but one of many that provided feedback.

Now HMRC have spoken. It’s quite a lengthy document, so I’ll summarise the key points raised.

A question of proportionality

HMRC have determined that penalties need to be raised for two kinds of reasons. The first concerns the general submission of information on time and the timely payment of any liability arising. The second is on the accuracy of the information being filed.

HMRC go on to say “the penalty system needs to work effectively to encourage those who make one off errors back into full compliance, and counter the activities of careless or intentionally non-compliant customers. So the ultimate goal is to charge fewer penalties, and for penalties to be well-targeted where we do charge them and to take account of the customer’s compliance history across all of the taxes they are involved with.”

In developing a new model for late filing penalties, HMRC seek to explore the following options:

• Not to charge a penalty where no tax is due and where circumstances for not charging are appropriate
• Not to charge a penalty where the period of lateness is very short
• Not to charge a penalty for the first default
• To take account of the taxpayer’s compliance history across all of the taxes that they are involved with
• To increase opportunities for and use mitigation in recognition of the circumstances surrounding the default and HMRC’s desire to encourage good compliance
• To use notifications to remind taxpayers that their returns are due, before the due date is reached, and to draw their attention to any default and its consequences for penalty purposes
• To potentially charge interest for late payments, rather than fixed penalties, which would ensure that this kind of non-compliance is proportionate to the amount of tax outstanding

HMRC state that they would intend to apply the same regime across all taxes.

With regard to errors, omissions and deliberate inaccuracies in returns, things appear to get a little tougher to determine.

The matter is somewhat complicated. Is the error genuine and, during the course of an investigation, can an inspector find evidence to prove one way or the other? Furthermore, during any investigation, was the taxpayer cooperative? If so, a lower penalty is more likely to apply than one to a taxpayer that attempts to thwart proceedings.

HMRC readily admit that this is a harder nut to crack but offer some thoughts based on the consultation. They could:

• increase reporting requirements or other administrative burdens
• set the penalty percentage to reflect the taxpayer’s compliance history
• consider whether de minimis limits should apply as a rule or whether different limits should be applied to different taxpayers
• increase penalty levels according to the degree of inaccuracy, the taxpayer’s compliance history and/or whether the taxpayer cooperated during any investigation

The final thing that HMRC might consider are non-financial penalties that are imposed to encourage compliance. These might include the reduction in time limits to meet future obligations, such as making a submission of a return or time to pay a tax liability.

When might things change?

According to the document, we’re unlikely to see any of the proposals enter the statute books any earlier than the Finance Bill 2017, which would then probably result in the rules changing until sometime later that year or even in 2018 if they are to commence with the next tax year.