On 17 September 2015, HMRC published its response to the consultation on the future direction of penalties. The paper garnered 92 responses with widely differing views but HMRC has drawn the following conclusions so far:
- There needs to be a distinction between those who have committed a one-off or minor compliance failure versus those who are habitually non-compliant. This requires penalties to be targeted and proportionate to the individual or business' compliance history.
- The new penalty model must be consistent across all taxes.
- They will focus first on late filing and payment penalties as these produce large volumes but are low in value and crucially for HMRC generate a lot of appeal traffic and customer contact that is expensive for them to resource. They plan to consider some, or all, of the following in the new penalty regime model:
- Stop issuing penalties for late filing if no tax is due as highlighted on the return
- Introduce a short period of grace after the filing deadline
- Introduce an unpenalised first default (as is already the case for RTI filing and payment penalties)
- Consider the taxpayer or business’ compliance history
- The ability to use mitigation to recognise why the default occurred
- Introduce warnings ahead of the issue of a penalty (again already part of the RTI model)
- Replace the current late payment default schedule with a penalty interest regime
Recognising the difficulty in designing a penalty regime that is simple and takes in to account compliance history where the failure is one of inaccuracy is much harder so that will be a separate strand of work over a longer time period.
As well as financial penalties, HMRC will continue to investigate if non-financial sanctions could be just as effective in changing compliance behaviours. This could include reducing the the deadline for filing for those who have been non-compliant so there is an incentive to develop good compliance behaviour.
Personally I was underwhelmed by the next steps outlined in the document. After 92 responses and three months to consider them I would have expected more concrete proposals, rather than just a reiteration of key principles. We are told to expect a further two consultations: one for late filing and payment and one for inaccuracies, with legislation not planned until Finance Bill 2017.
Having a fair, proportionate and targeted penalty regime is vital to both employers and their agents, but equally it can only be driven by accurate data capture. The frequent rebasing of the RTI penalty regime over the last three years appears to have been driven by the inability of HMRC to rely on its core systems. HMRC needs to address this issue if PAYE penalties can return to the automated approach that must be at the core of penalty system design given the department’s constrained human resources and also for them to rely on digital tax accounts reducing customer contact.
In the same way that the response document refers to low value but high volume penalties leading to unnecessary customer contact that they cannot resource, this is also the case with the current state of play with PAYE. Disputed PAYE charges are still difficult to raise and take far too long to resolve as they are resource intensive for HMRC. Let’s hope that the reason that this response document is vague in terms of concrete proposals is because HMRC is addressing the real ‘next step’ in penalty design: stable internal systems that are fit for purpose. Oh and by the way, where are the RTI penalties for the quarter ended 5 July, has anyone seen any or are agents and employers now operating PAYE perfectly?
Kate Upcraft is the author of the Payroll Unplugged blog.