Mike Down and Gary Heynes from Baker Tilly raise concerns that HMRC is applying its ‘new’ penalty regime for inaccurate tax returns a bit too zealously.
HMRC is on the look-out for new ways of increasing the flow of revenue into the Chancellor’s coffers. Encouraged by politicians of all parties and the media, the department is quite rightly encouraging defaulters to voluntarily come forward, chasing tax evaders and tackling those involved in aggressive tax avoidance schemes. However ordinary businesses and individual taxpayers are increasingly being caught out by what many will view as an attempt to raise revenue by the backdoor – put simply, HMRC appears to be over-zealously applying the ‘new’ penalty regime for inaccurate tax returns.
Introduced four years ago and still bedding-down, the new regime was designed as a simplified and transparent system which, whilst recognising that simple and innocent mistakes are made, would impose clear levels of penalties to punish errors where taxpayer ‘behaviours’ are at least careless, or deliberate.
The suspicion in some quarters is that revenue-raising in straitened times has become the driving principle with HMRC not accepting that genuine mistakes can and do in fact occur.
Critics point to incorrect tax return cases where HMRC accepts that a taxpayer might have made an innocent error, but still contend that he or she has failed to take reasonable care before signing the tax return. In such cases, a penalty of up to 30% of the extra might potentially be charged. HMRC also argues that the concept of reasonable excuse (which in the past has typically applied to cases of death of serious illness of a relative or business partner) has no relevance to the new inaccuracy penalty regime. Others point to HMRC’s reluctance to alert the taxpayer to the fact that in many instances, suitable conditions can be set to prevent the re-occurrence of an error, thus enabling the penalty to be suspended.
HMRC says that it is applying a simple rule: if a taxpayer has failed to take reasonable care then it is only right that a penalty should be charged. The difficulty, of course, lies in defining reasonable care. In a recent Tribunal case HMRC argued (unsuccessfully) that an error by an adviser was still the responsibility of the taxpayer. The argument was extended as far as an assertion that it was the taxpayer’s responsibility to ensure that the advice he had received was correct. The Tribunal, in finding for the taxpayer, pointed out that HMRC’s own guidance makes a clear distinction between someone who says “I leave it all to my agent” and another who checks the adviser’s work to the best of his or her ability and competence. The guidance summarises the difference quite concisely: “…an ordinary person cannot be expected to challenge specialist professional advice on a complex legal point. But they ought to be able to recognise the complete absence of a major transaction.”
It may be that the tide is turning against HMRC’s very strict interpretation of the new penalties legislation? A handful of recent Tribunal decisions have gone in the taxpayer’s favour and in the light of cases where relatively trivial errors and amounts are involved, HMRC’s critics may take the view that a form of penalty farming is taking place.