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Consultation on penalties launched by HMRC

February 12, 2015


HMRC is requesting feedback from taxpayers, tax credit claimants, agents and representative bodies on both the current penalty regime and its proposed future direction for penalties.  As part of its move towards a digital tax system, HMRC wants to look at whether the increasing amount of up to date information they hold on a taxpayer’s affairs could be used to create a more sophisticated penalty system which is customer-focused. 

A key concern noted in the consultation regarding the current penalty regime is that where taxpayers feel that a penalty is unfair or disproportionate this can have the opposite effect to that intended, actually discouraging taxpayers from complying with their obligations.  Another problem is that where many small automated penalties are issued these are not cost-effective to administer and collect, and they want to “consider moving to a different model”.  HMRC says that this is currently the case for Income Tax Self Assessment and that they expect this to also be the case for PAYE RTI.  The first RTI late filing penalty notices for large employers are expected to be delivered this week, but there is no indication of the likely number of these penalty notices as yet.

Possible changes to the penalty system are also discussed.  The five principles HMRC is proposing to guide a new approach to penalties are:

1. 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

2. Penalties should be proportionate to the offence and may take into account past behaviour

3. Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant

4. Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner

5. Customers should see a consistent and standardised approach. Variations will be those necessary to take into account customer behaviours and particular taxes.

Considerations which need to be examined in light of these principles include whether penalties should always be imposed (for example if a usually compliant taxpayer has an exceptional failure) and what HMRC’s response should be where taxpayers new to a particular procedure make mistakes or require extra help.  Another consideration is whether HMRC should continue to look at penalties for each tax and for each type of failure (i.e. failure to file on time, to pay tax or to provide information) in isolation or whether it would be more appropriate to have a penalty system based on the overall position of a taxpayer; this could be facilitated by a personal digital tax account showing all the taxes they need to pay in one place. 

A possible alternative suggested by HMRC to the current penalties is a progressive system where financial penalties are not imposed immediately, but if the taxpayer persists in non-compliant behaviour or there is a more serious failure then the sanctions imposed would be more severe.  HMRC also mentions the possibility of using non-financial sanctions as an alternative penalties, and asks whether there are incentives which could be used to encourage compliance.

This consultation, part of the first step in the process of changing the penalty regime, closes on the 11th of May 2015 and can be viewed here.

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