Claimant hit with tax penalty - update
UPDATE: The investigations specialist representing a self-employed Kent tradesman who was penalised for overclaiming a £2,000 rebate under HMRC’s new penalty regime has explained the background details to AccountingWEB.co.uk.
According to McGrigors, the firm that represented the unnamed taxpayer, the penalty was incurred because his original calculation of the size of the rebate was inaccurate. The claimant thought he was owed £3,000 but the actual amount was £1,000.
Under the old penalty system, HMRC fined taxpayers who had either underpaid their taxes or were late submitting their returns or paying their taxes. With the new regime, HMRC can now levy penalties on individuals and businesses for inaccuracies in tax returns and other documents and can raise penalties even if the taxpayer is owed money. The new approach allows HMRC to impose a maximum penalty of 30% for “careless” mistakes, and between 30% and 70% where taxpayers have been deliberately misleading, but have not concealed their actions. Those who have been deliberately misleading and have concealed their actions can pay fines ranging from 50% to 100% of the amount owed.
In this case, the taxpayer was fined 70% of the £2,000 difference between the size of his claim and what he was actually owed, which amounted to £1,400.
Phil Berwick, director of tax investigations at McGrigors, explained the full background to AccountingWEB.co.uk. In 2009, the taxpayer completed his first self assessment tax return on paper, without the assistance of an adviser. As a self-employed subcontractor under the Construction Industry Scheme, he interpreted the form’s instructions to mean that he did not have to file full details of his income or expenditure if he earned less than £30,000, but he did include the full amount deducted under the CIS.
HMRC spotted that he couldn’t have had CIS deductions without any income and wrote back to ask if he had made a mistake to open an enquiry into the matter. “If he had completed it online, he wouldn’t have been able to file because the return would have been rejected,” Berwick noted.
McGrigors was brought in by the accountant who now represents the taxpayer. “We found [the case] so outrageous, we gave the accountant some pro bono advice. We were provided with the correspondence... and concluded that the official could not have followed HMRC’s published procedures,” said Berwick.
No human rights leaflet had been included in any of the letters to the client and HMRC had thanked the taxpayer for his co-operation: clear evidence that there was no attempt at concealment.
“The tone of the correspondence was not appropriate for an unrepresented taxpayer, according to HMRC’s guidance, and there was no dialogue about the error and what category it should fall under,” Berwick said. “If HMRC accepts it was a careless mistake, the penalty should be suspended; because it could be capable of being repeated, it would fall within the suspension rules.”
The firm went public with the circumstances of the case to highlight the way the new regime had been applied in this instance. “We’re looking to alert advisers and the general public that this has happened and to make sure HMRC applies the guidelines correctly,” Berwick said.
Mainstream news media focused on how the penalty was being raised against a taxpayer who was owed money, but Berwick worried whether the HMRC was going to replicate this approach to errors on returns. “It may well be a one-off where an individual officer has applied the rules wrongly, but if officers across the country feel this is how they need to behave, that would be a concern,” he said.
McGrigors also took up the matter with a senior official in HMRC’s penalty project team who was “very understanding” and said he would take the case up as a complaint. “If the client is not satisfied with the result, the appeal process is still open to us,” Berwick added.
HMRC said confidentiality prevented it from commenting on individual cases, but emphasised that it took a more lenient approach to those who take all reasonable care to get things right, and who co-operate with the department’s investigations.
“We can’t issue arbitrary penalties. It all depends on the individual’s behaviour,” said an HMRC spokesman. “An adviser who commits or conceals an error, for example, could expect a far higher level of penalty than an ordinary taxpayer.”
HMRC’s online FAQ on the new penalty regime emphasises that officers involved in compliance checks receive training on understanding the types of inaccuracy and behaviours as well as appropriate use of suspended penalties (also see comment below).
While McGrigors emphasised there is now a greater onus on taxpayers to make sure their claims are accurate - and should be checked by a professional adviser - AccountingWEB.co.uk tax editor Rebecca Benneyworth took HMRC to task for claiming that the penalties have not gone up under the new regime.
“Why not say, ‘Yes, they have gone up substantially if you lie about your tax - pay up and don't do it again.’ Then people would understand.” she said.