Improving Penalties

HMRC contemplate more fine tuning of penalty system

As HMRC transform to deliver more digital services the department is now considering the way that penalties are applied so they get things right first time – now there’s a novelty!

This then is the subject of ‘HMRC Penalties:  a Discussion Document’ that runs from 2nd February – 11th May 2015.

This current document also follows the Office of Tax Simplifications’ recommendation that there should be a review of penalties.

Penalties are applied to encourage taxpayers to comply with their obligations and to punish those who don’t, in turn reassuring the compliant majority that they will not be disadvantaged by those who don’t play by the rules. The Revenue are at pains to point out that they don’t use penalties as a way of raising revenue and that it is compliance they crave not fines.

Whilst there are many different penalties they broadly fall into three main categories:

1. Failure to meet a time-bound obligation, such as submitting a return or making a payment by a specified deadline. These type of penalties are generally automated.
2. Failure to meet a regulatory obligation, e.g. notifying HMRC of a liability to tax.
3. Behavioural based penalties for submitting inaccurate returns and documents.

Taxpayers and the tax profession have raised some concerns about how HMRC apply penalties in practice. One prime example is the fixed £100 fine for not filing a tax return by the statutory deadline. Prior to February 2012 this penalty was cancelled if no tax was owing and whilst the move to an immovable fine has significantly improved on-time filing it does mean that some taxpayers are hit with a penalty when there is no tax at risk.

As HMRC changes the way in which they operate in an increasing digital world, the department believes they should change the way in which they apply penalties. Their current thinking is based on five principles:

1. The penalty regime should be designed from the taxpayer’s perspective with the aim of encouraging compliance and preventing non-compliance. Neither should penalties be used as a ‘cash cow’.
2. Penalties should be proportionate to the offence and take into account past behaviour.
3. Fairness in the application of penalties, ensuring that the law abiding citizens are in a better position than those who transgress.
4. Penalties must pose a credible threat.
5. Consistency and a standardised approach in applying penalties.

The Revenue now needs to consider:

• Whether penalties should be applied for uncharacteristic failure by an otherwise compliant taxpayer.
• Their response to those that make a simple mistake when encountering a particular tax regime for the first time and those that need extra help.
• Whether a taxpayer’s compliance with each of their obligations should be considered separately or should penalties take account of their behaviour as a whole.

A couple of options that HMRC have thrown into the arena are the use of non-financial sanctions as an alternative to financial penalties and a progressive system of penalty points similar to the motoring system.

The full HMRC Penalties Discussion Document can be downloaded below:

HMRC Penalties: A Discussion Document