HMRC consulting on radical changes to tax penalty regime

The penalty regime currently operated by HMRC is coming under increasing criticism, and in consequence HMRC is considering radical changes to the entire system.

Automated penalties on both direct and indirect taxes have been denounced as being disproportionate and unfairly applied. For example, HMRC enforces a £100 fixed penalty for late filing of self-assessment tax returns irrespective of whether any tax is outstanding or not.

It also takes no account of a person’s past filing history. Then there are the penalties based on subjective tests. When errors arise in tax returns, HMRC interprets a tax payer’s behaviour in order to establish whether reasonable care was taken, or whether an error arose from careless or deliberate behaviour.

This approach gives rise to inconsistencies, as HMRC may then apply a penalty based on unrealistic expectations of a taxpayer’s behaviour. This issue was recently highlighted in the First Tier Tribunal of Herefordshire Property Company Limited v HMRC. HMRC sought to argue negligence, but the tribunal accepted that the taxpayer’s behaviour had been reasonable.

HMRC is aware of the shortfalls of the current penalty regime. So, as tax compliance increasingly moves online and HMRC has more data at its disposal, it intends to use its improved analytical capabilities to apply penalties in a more sophisticated way.

In February 2015, it issued a consultation document that could completely alter the way penalties are applied.

Changes being considered include non-financial sanctions. And rather than imposing penalties on a tax-by-tax basis, HMRC would consider the taxpayer’s overall compliance record. There may also be a progressive penalty-point system similar to that for motoring offences. This would be lenient to conscientious taxpayers who make the occasional mistake, and would impose heavier penalties for persistent offenders.

The closing date for submissions was 11 May 2015. However, until more is known about the proposed changes, we cannot fully assess the implications. At this early stage, the best advice is that tax payers should continue to take reasonable care with their tax affairs.

Download the tax update here.