Future of tax penalties

Response to discussion document on penalties

Earlier this year HMRC published a Discussion Document on penalties, seeking views on how to change the way that penalties are applied as HMRC is transformed to deliver more digital services. That consultation closed in May and generated a lot of interest and the Revenue has now released the summary of responses.

The Discussion Document proposed five broad principles that HMRC consider should underpin any new penalty regime, those being:

The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance. Penalties are not to be applied with the objective of raising revenues.
Penalties should be proportionate to the offence and may take into account past behaviour.
Penalties must be applied fairly, ensuring that compliant taxpayers are (and are seen to be) in a better position than the non-compliant.
Penalties must provide a credible threat.
Taxpayers should see a consistent and standardised approach.

The comments HMRC received broadly focused on existing penalties that address failures to comply with two kinds of obligations; the obligation to file or pay on time and the obligation to submit accurate documents.

There were differing views about the best overall penalty model with some favouring a greater use of interest in place of penalties.

A view expressed by almost all respondents was that an ideal penalty system should be one that is simple, flexible, proportionate and tailored; a system in which penalties are only issued where they are deserved.

There was general support for tailoring the penalty to take account of the taxpayer’s overall compliance position and to reflect the nature or seriousness of the non-compliance rather than applying penalties on a tax-by-tax basis.

Many also agreed that penalties for first-time offences should ordinarily be suspended, subject to conditions and supported by HMRC- provided education, to encourage future compliance.

Suggested changes that could improve compliance included:

issuing a warning letter (rather than a penalty) to first-time offenders;
setting earlier deadlines for non-compliant individuals;
staggering the due dates for returns and payments so that the return always falls due before the payment; and
refunding penalties if compliance improves within a specified timeframe.

HMRC will take account of the responses and explore opportunities to thoroughly test any changes with taxpayers before they are widely introduced.

A series of options in respect of the review of penalties will be developed by HMRC over the next few months.

A further consultation document on the proposals for a new penalty system for late filing and late payment will be the next step, followed by a document on inaccuracy penalties. Should the Government then decide to enshrine any changes in legislation, then the earliest this could happen would be 2017.

The full document can be viewed here on Gov.uk