Tax penalty regime, mitigation, suspension and current developments

HMRC is examining its tax penalty regime. Learn how and have your say.

HMRC has always stated that it uses penalties to stop people who don't take care from gaining an unfair advantage. 

The current penalties regime is supposed to reflect the behaviour of the taxpayer and their willingness to set things right once the error has been noticed. A penalty is due if the return or other tax document was inaccurate and tax has been unpaid, understated, over-claimed or under-assessed as a result. 

HMRC has indicated that it will not charge a penalty for an inaccuracy if the taxpayer can demonstrate that he took reasonable care to get things right but the return or document was still wrong. Example indicators of reasonable care by a taxpayer are keeping accurate records and checking with a tax adviser or HMRC regarding contentious matters. 

The statute contemplates three categories of behaviour that attract penalties: 

  • Carelessness – this is where the taxpayer failed to take reasonable care to get things right
  • Deliberate but unconcealed – this is where the taxpayer knew that a return or document was inaccurate but made no attempt to conceal the inaccuracy. Examples of deliberate inaccuracies include knowingly overstating business expenses, understating income or paying wages without accounting for Pay As You Earn and National Insurance contributions
  • Deliberate and concealed – this is where the taxpayer knew that a return or document was inaccurate and took active steps to hide the inaccuracy. An example of taking active steps to conceal an inaccuracy is creating false invoices as evidence of a non-existent stock purchase.

Inaccuracies that are neither careless nor deliberate are deemed to be so if discovered by the taxpayer and steps are not taken to inform HMRC. 

Mitigation

The maximum mitigations are: 

•  Carelessness: 0%, mitigable to nil for unprompted disclosure and 15% for prompted disclosure SHOULD THIS BE 10%
•  Deliberate but unconcealed: 70%, mitigable to 20% for unprompted disclosure and 35% for prompted disclosure
•  Deliberate and concealed: 100%, mitigable to 30% for unprompted disclosure and 50% for prompted disclosure.

The reduction will depend on quality of disclosure and level of assistance which the taxpayer provides to HMRC, also referred to as 'telling, helping and giving': 

  • Telling gives a possible reduction of up to 30%
  • Helping gives a possible reduction of up to 40%
  • Giving access to records gives a possible reduction of up to 30%.

Suspension

Finance Act 2007 Schedule 24 paragraph 14 allows HMRC to suspend all or part of a penalty for a careless inaccuracy by notice in writing.

The penalty provisions in Finance Act 2007 seek to influence behaviour by encouraging and supporting those who try to meet their obligations and penalising those who do not.

HMRC may suspend all or part of a penalty only if compliance with a condition of suspension would help the taxpayer to avoid becoming liable to further penalties for careless inaccuracy.

A condition of suspension may specify action to be taken, and a period within which it must be taken. On the expiry of the period of suspension, if the taxpayer satisfies HMRC that the conditions of suspension have been complied with, the suspended penalty or part is cancelled. If the person fails to satisfy HMRC that the suspension conditions have been met, the taxpayer must pay the suspended penalty all or in part.

If, during the period of suspension, the taxpayer becomes liable for another penalty, the suspended penalty becomes payable. A person may appeal against an HMRC decision not to suspend a penalty or against any of the suspension conditions set.

HMRC has provided toolkits, which list common errors in returns and suggest how to avoid them. If an error appearing in the toolkits is still made in a return submitted to HMRC, this is likely to attract heavier penalties.

Current developments

HMRC is considering now moving away from the current penalty system with one option being a progressive system similar to penalty points for motoring offences. So initial financial penalties can be avoided, but for persistent non-compliance or serious failures, the penalties are more substantial. There may be advantages in not initially applying penalties, but the downside is the risk that customers will fail to realise the importance of non-compliant behaviour.