OTS highlight inconsistencies in tax penalties
As well as being tasked with reviewing employment status in July, the Office of Tax Simplification (OTS) was also asked to carry out a review of tax penalties. The fruits of their labour have now been set out in their final report.
Apologetics
The report begins by stating that penalties are necessary in any tax system. There are numerous civil penalties within tax legislation, with one penalty dating back to 1842 and unchanged since then! The most recent penalties, introduced in Finance Acts 2007 – 2009, are aimed to change the behaviour of taxpayers by applying more severe penalties to those who:
- provide incorrect information;
- do not notify chargeability to tax;
- do not submit tax returns; or
- do not pay the tax due on time.
Due to the limited timespan, the OTS have only been able to carry out a short exploratory project which proves the case for a further review and highlights the main areas of concern. The review focused on addressing the inconsistencies in the application of the ‘new’ penalties.
People that the OTS spoke to generally considered the legislation for the ‘new’ penalties to be sound and there was no wish to recommend changes to the principles within the legislation. The issues and concerns raised were mainly around the application of the penalties by HMRC staff. It was also recognised that there was a need to impose more severe sanctions on those who deliberately try to evade paying the tax that is due but the feeling was that some penalties are being imposed either on the wrong people, or for the wrong reasons.
Findings
The basic question the OTS asked was: are the new penalties working in line with their objectives? Perhaps ‘yes’, but whether they are promoting the behavioural change intended is not proven.
The remit for this review was to concentrate on civil penalties, including the operation of suspension, reasonable excuse and special reduction. The key issues that emerged surrounded the areas of the impact of the automated penalties for late filing on the more vulnerable members of society and consistency of application of the behavioural penalties including suspension of careless penalties.
There are various recommendations around the number of erroneous entries on the Income Tax Self Assessment (ITSA) register of people who should not be registered. These registrations compound the problem of the automated penalties which are issued to people who should not be on the register in the first place.
HMRC recognised that the introduction of behavioural penalties was a cultural change for their staff, which has been difficult to implement. HMRC are still considering methods to increase the understanding of these penalties to gain consistency in their application and carry out regular assurance activity to assess the accuracy of the penalties issued. There are a number of recommendations covering this area.
In all 14 immediate recommendations have been made by the OTS as a result of their findings, all aimed at improving the workings of the penalties system but these are not legislative simplifications. Some of these are as follows:
Income Tax
| Problem Area | Recommendation |
|---|---|
| In some cases, where Self Assessment Tax Returns are filed online, the return is completed, a tax payment made but the form itself is not actually submitted, resulting in a late filing penalty. | On-screen warning to advise taxpayers that, if they leave the application at this point, they will not have submitted the return so need to ensure that this is done or they could incur a penalty. |
| Taxpayers ring the HMRC contact centres when struggling with tax returns but late filing penalties are not routinely mentioned so some taxpayers are unaware that these could be imposed. | Staff training provided to contact centre staff regarding late filing penalties and that information on these is added to the scripts used by staff. |
| Summaries produced by the SA system are issued to give information on the tax, interest and penalties owed which are very confusing. | HMRC issue a covering letter to go out with the statements to give a summary of the total tax and penalties owed for each tax year to provide a more simple explanation. |
General
| Problem Area | Recommendation |
|---|---|
| Lack of consistency in the application of penalties by HMRC. | HMRC provide further training for managers to emphasise their role in how penalties are applied and to promote more consistency amongst their staff. |
| Lack of consistency across HMRC with regard to suspension of penalties caused by taxpayer ‘carelessness’. | HMRC carry out assurance work to investigate why careless penalties are not being suspended when it would be appropriate to do so. |
| All HMRC staff use the Compliance Handbook for penalties and complete the Penalty Decision and Action Checklist but this has not proved effective in itself in ensuring consistency. | HMRC investigates alternative methods of publicising the behaviours and suspension criteria so that staff better understand how to apply these. |
VAT
| Problem Area | Recommendation |
|---|---|
| The VAT register has some VAT registrations for businesses who are no longer trading. | De-register those businesses that are no longer required to be registered. |
| The VAT system for late filing/late payment differs from other taxes. | VAT be brought in line with other taxes |
The OTS were not given enough time to look at simplifying the overall penalty system in order to reduce the numbers of different penalties and bring the different taxes into the same penalty regimes, getting rid of outdated penalties and those that are never used. Nor was there time to look at the complex legislative framework within which the new penalties operate to see where this could be simplified. The OTS would like to look into these areas in a future project.
Inconsistency is a major problem – I recommend that penalties are automatically applied for failing to answer letters in a timely manner. If these were applied symmetrically with the late filing penalties then perhaps HMRC would be resourced at the right level to deal with enquiries. “end sarcasm”