AccountingWEB asked members for their comments on the HMRC discussion document on penalties recently.
The discussion document states that whilst penalties should reinforce legal obligations and deter non compliance, they should also be clearly understood, consistent and proportionate.
It is AccountingWEB members’ belief that the penalty provisions as they stand fulfil none of these principals. Becoming digital will only reinforce the confusion that surrounds the penalty regime.
The reason for penalties should only be as punishment – punishment for not complying timeously with the rules and as such members are of the belief that penalties should remain in some format. TaxTeddy commented: "Without the stick of penalties to beat recalcitrant taxpayers HMRC would have very many cases of non-compliance, which is clearly not an option".
But members say that the current penalty system is unfair being disproportionate to the tax due and the type of offence. Penalties and compliance should target deliberate serious offenders - not those ‘customers’ who make a mistake or have little understanding of their tax obligations. ‘Failure to file’ is not always the ‘customer’s fault - the system should not automatically assume that it is.
The main problem of automated penalties means that so many of the minor penalties are issued incorrectly and the appeal process is too protracted.
The current system certainly is not ‘fair’ or ‘in proportion’ neither is it ‘customer focused’ nor does it ‘recognise differences’.
Answers to questions:
Question one: To what extent are the concerns expressed above typical of actual situations?
The first concern given is ‘Where customers believe penalties to be unfair and/or disproportionate, it can have implications for their future compliance. Research suggests this can lead to increased non-compliance’.
It would be interesting to read this ‘research’ as this is not necessarily the experience of members. AccountingWEB members are accountants who deal with the self employed and small businesses. Members find that when clients’ are charged the higher penalties then this does lead to increased compliance. However it needs to be remembered that taxpayers become clients because they want to comply.
It is very telling that the second concern states that ‘these penalties can be appropriate in certain circumstances, but they tend to be small and so to be more costly and resource intensive’. If the penalties ‘tend to be small’ this must mean that they mostly comprise the lower penalties for late submission rather than being for the more serious failure of non disclosure.
The VAT penalty regime works because more returns are required to be submitted in a shorter time frame. It is also a tax where many are initially unaware of its precise workings and as such penalising for non submission within a 12 month period should be retained.
A similar system possibly needs to be used for the PAYE/CIS tax.
Question two: What do you consider to be the major areas of concern with our penalty regimes?
Any review of the penalty system should focus on whether the penalties being charged are proportionate to the tax due. It was the overwhelming opinion of members that the automatic £100 penalty to those whose final tax bill is nil is unfair. As the consultation text acknowledges some ‘customers receive a penalty when there is no tax at risk’.
Many members believe that a penalty should be mitigated to such a level that it does not exceed the tax liability once the missing/late return has been rendered. If penalties are not to be applied with the objective of raising revenues then why penalise such taxpayers as CIS subcontractors who are refund taxpayers?
No tax is lost by submitting late returns and the ‘penalty’ should surely be the loss of investment interest received; the government gaining from the money not claimed.
Question three: What do you view as being the priority areas for the initial focus of this work?
One area of the penalty regime that needs particular review is the automatic monthly increase in penalties and in particular the daily penalty charge which, in a relatively very short time can increase to £900 which, for a liability of less than this amount, does not fall within the principal of being ‘fair ‘ or ‘proportionate’.
It is appreciated that following Donaldson v HMRC such penalties are legal but although taxpayers have knowledge of the £100 penalty the majority are unaware of the daily penalty.
Question four: Do you think that an approach which focused more on individual behaviour would help?
The phrase ‘taxpayers’ behaviour’ requires more explanation. What is clear from the consultation paper is that should this form of approach be implemented that HMRC will be looking for a pattern of non submission or late payment and allocate penalty points accordingly. Obviously this will have implications for the calculation of interest charges.
It must be hoped that they will not be automatic in their assumptions and appreciate that if a taxpayer is submitting or paying late for all or a couple of taxes that there may be something wrong with his business, cashflow wise and therefore need help in formulating a tax payment strategy rather than issue automated penalties.
Personalised customer accounts will enable the differing types of tax paid by any one ‘customer’ to be viewed on one page. A concern must be that HMRC will use the account information in an attempt to achieve higher penalties. The intention is not flagged but on page 13 section 5.8 are the words ‘we may need to move away from applying penalties on a tax-by-tax basis and towards a penalty system based on the overall position of the customer.’
Does this mean points being allocated and penalties charged on the total amount of tax unpaid whichever type of return or payment is late?
Question five: What do you think should trigger a penalty?
As stated above members are of the opinion that penalties should remain but targeted more effectively. HMRC computer should be able to ascertain persistent late returns and payments. The higher penalty rates are for ‘reasonable care’ and, although subjective, members are of the opinion that they should remain.
A penalty ‘window’ would enable taxpayers who are a few days late to understand that they should not be late again. As with the VAT system higher penalties should be charged for subsequent lateness and possibly charged at an amount relative to the size of income i.e. the larger businesses to be charged at a higher rate rather than using a percentage of tax.
Question six Are there incentives HMRC could consider to encourage compliance?
One member put forward the suggestion that rather than penalties as a way of encouraging compliance that there should be a reward system that encourages early submission and early payment of tax - quite simply a tax discount for early payment. A possible scheme could be returns submitted within three months £100 tax reduction, tax paid at same time £200 reduction and similar graduated reduction of reward to a nil position at 31 January.
Or possibly charge a higher penalty but not collect until or if there is another failure within the next three years.
Question seven: What could HMRC do better to explain sanctions and the role penalties play within them?
The penalty regime is not sufficiently known or understood by taxpayers. Many become accountant’s clients after they receive demands for large payments of which they do not understand why they have been issued.
What is certain is that HMRC could and should encourage submission sooner and more often.
As they apparently have such a sophisticated computer system they should be able to pick out those who are first time defaulters and make an effort to explain the system more effectively.
Companies House already sends emails reminders and as HMRC’s Digital Strategy is for contact with ‘customers’ via email, it should be possible to send targeted emails issued perhaps a month in advance of the final submission date to all who have not submitted.