On 02 February 2015, HMRC published a Discussion Document regarding its penalty regime and how this should, or could, change.
This was all with the backdrop of HMRC’s continuing move to digital. The Discussion Document said that any changes to the penalty regime would be based around 5 key principles:
- A penalty regime should only exist for the purposes of encouraging compliance and preventing non-compliance. It should not be an income-generating regime
- The penalty charged should be proportionate to the non-compliance and may take into account previous behaviour
- Penalties should be applied fairly so that compliant ‘customers’ (employers, agents, individuals etc) can clearly see that they are in a better position of they conform
- HMRC must have the power to recognise non-compliance and, having recognised it, have the systems and procedures in place to actually be able to charge it in a cost-effective way
- Any penalty regime must be seen to be consistent, though previous non-compliance activity and the type of tax will mean that penalties have to vary
HMRC’s Summary of Responses document was published on 17 September 2015.
As you can imagine, discussion on the issue of penalties generated many responses and comments, therefore, the Responses document needs to be digested fully to see all comments and points of view that were expressed. However, in general, responses were broadly in favour of the above principles and ‘an ideal penalty system is one that is simple, flexible, proportionate, appropriate and tailored; a system in which penalties are only issued where they are deserved’.
I would comment that such a penalty regime seems to be an Eldorado situation – one that is certainly reasonable, one that seems to meet HMRC’s principles but one that, surely, is impossible for them to administer. Perhaps, in the day that a local tax office was staffed by somebody that you could actually talk to it would have been workable. However, is a regime that is simple, flexible and tailored actually achievable, given that we are in the automated and system-generated 21 century?
HMRC’s ‘Next Steps’
I am pleased to see that HMRC have recognised that reforming the penalty regime in line with their principles will not be easy. Then they mention about their ‘making tax easier’ plans, which will introduce digital tax accounts for everyone, making it easier for them to manage their tax affairs online (digital tax accounts is a step towards the goal of abolishing the Tax Return by 2020). I cannot quite see the relationship between non-compliance and digital accounts, save for the fact that having all tax information in one place will make it easier for the individual, employer, agent etc to see if there is non-compliance. However, I think that it does show that the emphasis for HMRC is the introduction of these digital accounts.
HMRC do seem to recognise that, even with digital tax accounts, there will still be non-compliance, whether this be accidental, through carelessness or deliberate. Therefore, HMRC acknowledge that there will still be a need for a penalty regime. In this regard, HMRC say that, in future, they will work to identify those who are the most non-compliant so that penalties can be targeted at them rather than the vast majority who are complaint. The aim is better-targeted and fewer penalties, freeing up resources to tackle serious non-compliance. This is totally within the Government’s remit to HMRC which is to raise more tax revenue for less money. In respect of some specific penalties:
Together with reforming the late payment penalties, late filing will be their priority – this will be for all taxes, not just tax and NICs due via PAYE. They will look at a number of ideas for reforming late filing penalties, such as not charging where no tax is actually due, not charging for the first default or where the delay is short and the use of notifications to remind customers about their filing obligations ahead of the filing date.
This sounds like an expansion of concessions that they have already introduced, so there is nothing exiting here.
HMRC will look at only charging penalties in accordance with the value of the tax underpayment and how long that value remains unpaid. This will be via an interest regime and, as above, will be consistent across all taxes, not just PAYE.
Again, nothing really exciting or revolutionary here, just a variation of penalty regimes that have applied previously.
Penalties for inaccurate returns or payments are more difficult to identify and, therefore, HMRC will take longer to work on a new penalty regime for these. Of course, this is understandable, given that inaccuracies are the result of a number of reasons, right from genuine error or carelessness through to deliberate fraudulent activity. There is nothing very exciting in the Responses document that indicates how HMRC will deal with inaccuracy penalties differently in the future, save for the fact that offenders may be required to increase their reporting requirements or other administrative burdens. This will be a new approach – i.e. if you are consistently inaccurate in your reporting and payment, you may be required to increase the frequency of your reporting and payment so that HMRC can check that non-compliance is not continuing.
I was pleased to see that HMRC make reference to the importance of guidance. However, the Responses document seems to suggest that this guidance will be provided through the digital tax accounts. So, on the one hand they say that they recognise the importance but on the other they say that this will be provided in a tool that is some way off being delivered! That is disappointing.
Look out for
HMRC say that consultation will continue in the near future, specifically regarding a new penalty regime for late filing and late payment. This will be followed by another discussion document on penalties for inaccuracy. If legislation is required, the earliest that could appear is Finance Bill 2017.
HMRC will publish a roadmap for digital accounts towards the end of 2015. This seems to be their focus, understandably so, and we should all be looking at these as the future. Look for affirmation of HMRC’s digital strategy, possibly in the 2015 Spending Review.