Tax penalties: kicking where it hurts

PENALTIES ARE IN THE NEWS and, just like England’s Rugby World Cup campaign, they are not featured in a positive light. In the past week, HM Revenue & Customs has reminded taxpayers that the paper deadline under the new self-assessment charges is approaching at the end of this month; new figures have shown that the number of penalties issued has been increasing; and the rows have erupted over recent penalties-related tribunal rulings.

The underlying trend here is that the Revenue, as in many areas, is taking a harder line. It claims this is to improve compliance, but commentators claim it is a cynical way of increasing revenues. So where does the answer lie?

New regime

The new penalty regime will be in place for people who miss this year’s self-assessment deadlines. And there is no doubt it is tough. A fixed penalty of £100 will apply to anyone who is due to submit a self-assessment return, which is the same as last year. But, crucially, this penalty will be applied to people who owe nothing and even those who are owed a refund by the taxman.

There will also be stringent new tariffs. If the penalty is three months late, £10 will be added a day to a maximum of £900. After six months, an automatic £300 or 5% of the tax due is added; and another £300 or 5% is added after 12 months.

HMRC says that the penalty regime will help with the process as, quite simply, fewer people will submit tax returns late. A spokesman says: “We want tax returns back not penalties, so nobody will receive a penalty where they file a tax return by the deadline or have a reasonable excuse for failing to do so. Penalties exist to encourage people to file on time.”

Fine time

But figures obtained by law firm McGrigors suggest that, even before these new powers are implemented, the number of penalty notices issued has been rising. The number of fines issued this year was 1.5 million. This is up 8% from last year and up 56% from 2006 figures.

This is a sign that HMRC is being too punitive in its issuing of penalties. “The processes are not set up to help taxpayers avoid penalties,” says Jason Collins, tax partner at the firm. “They should be used to promote compliance.”

The new penalty regime is worrying because of the lack of scrutiny employed when issuing fines. “Looking at court judgments it certainly seems that HMRC is churning out fines all too indiscriminately. As the number of fines has increased so have number of innocent taxpayers caught by fines,” Collins adds.

In the recent case involving Hok Limited, Geraint Jones QC criticised the use of the regime. “HMRC is an organ of the state. It is no function of the state to use the penalty system as a cash generating scheme,” Jones says. “The penalty system has a legitimate aim, which is to ensure that appropriate filings take place in good time and to discourage default.” HMRC has not always used it for this purpose, he concluded.

Even at £100 for every penalty issued, this would collect £150m for the Exchequer, perhaps even more when the more punitive regime is set up. The impact assessment concerns the change for the whole penalty regime, and doesn’t include details of how much these particular penalties will recoup.

Ignoring precedence

But, as Collins points out, the revenue generated by penalties is a drop in the ocean in what HMRC collects in tax revenues.

It is more likely that the penalties are designed to improve compliance. However, this does not mean that HMRC is implementing them in a way that best achieves this aim.

Automating the system further is alienating some compliant taxpayers. Recent rulings by Jones and others have been reported extensively by Accountancy Age. Among other areas, HMRC’s definition of what constitutes a reasonable excuse has come under fire.

It is telling that, despite many of these rulings, HMRC is still continuing with some of the very practices that have been criticised already. As Accountancy Age recently reported, HMRC is still issuing penalty notices for employer’s end of year months after the May deadline, allowing penalties to accumulate. Jones had said that there was “no logical reason” to delaying the process “so that, in effect, a minimum penalty of £500 will be levied unless the taxpayer has unilaterally realised that it has failed to undertake the necessary filing”.

However, HMRC has not updated its systems to send the penalty notices before the fines begin to accumulate. Advisors are reporting that HMRC has begun sending these notices out for the 2010/11 tax year.

In a similar vein, another taxpayer received a similar notice about an error made while submitting their end-of-year employer return. Unbeknown to the taxpayer, their tax return had only been submitted as a test on the HMRC website. The taxpayer received an email titled “SuccessResponse” with messages that said “this submission would have been successfully processed if sent under non test conditions” and “the EOY Return has been processed and passed full validation”. The taxpayer’s fine had also accumulated. Again, this practice was criticised in a previous case, involving Writtle College Services.

Nigel May, tax partner at McIntyre Hudson, says: “HMRC seem to have steamrollered through regardless of the findings of the first tier tribunal in cases which would seem to be directly applicable.”

Neither revenue raising nor improving process

The new penalty regime will certainly strike fear into taxpayers. Perhaps by doing so, it will increase compliance.

But unless there is a greater leniency in true cases of reasonable excuse, the new regime, like the practice of dwarf throwing, will no doubt continue to be condemned.

Image credit: Shutterstock

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