New error and wrongdoing penalties bite

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If you exceed the road’s speed limit in front of a traffic camera, you expect to receive an automatic speeding fine, and possibly points on your driving licence, says Rebecca Cave.

Many tax penalties work in a similar fashion – if a taxpayer is slow in paying tax or submitting a tax form, the HMRC computer spits out an automatic penalty. In some cases one free pass is allowed, but the principle is straightforward: Act too slow and you get a penalty.     

However, when the structure of HMRC powers and penalties was re-drawn in 2009, the circumstances in which tax penalties could arise were expanded considerably. Now there are potential penalty traps in all of these situations:

  • failure to notify HMRC of a chargeability to tax
  • error or mistake on a return
  • failure to keep or retain records
  • failure to submit a return online
  • wrongdoing relating to VAT or excise duties

Some of these new penalties are starting to be challenged in the tax tribunals, and the results are quite shocking.

In Lucam Consultancy Ltd v HMRC the penalty for VAT wrongdoing was £57,768. That penalty was imposed because the company charged VAT on its invoices for a nine month period, while it was not registered for VAT.

In fact the company had applied to register for VAT in good time, but HMRC had some questions about the application and attempted to contact the company director (Ms Foy) by phone, email and letter. Ms Foy claimed she didn’t receive any of these messages, but the tax tribunal was not impressed by her evidence. Judge Hacking ruled that her action in charging VAT when her company was not VAT registered was deliberate, and the penalty was upheld.

In the case of Timothy Hutchings v HMRC a penalty of £87,533 (50% of the IHT avoided) was imposed for an error in the IHT return completed by the executors of the late Mr Robert Hutchings. However, the error was attributed to the deliberate action of Tim Hutchings, a beneficiary of the estate, so the penalty was imposed on him rather than on the executors.

The facts of the case reveal an undeclared offshore account in the name of the deceased, from which £443,669 was transferred to Tim Hutchings, some six months before the death. This gift was not declared on the IHT return and hence gave rise to the error and the penalty.

If you are still blasé about HMRC’s powers to impose penalties, I would recommend you take a few minutes to read these cases. The HMRC compliance factsheets also provide a succinct summary of the level of penalty which can be imposed in each circumstance.

Rebecca Cave is the author Tax Rates and Tables 2014/15 published by Bloomsbury Professional.

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

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28th Jan 2015 13:38

I'm not

so sure that the above 2 cases are what you would call error or mistakes.

Charging VAT when you're not registered and not declaring an offshore account isn't really a mistake is it? An error of judgement probably.

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28th Jan 2015 13:50

The fines are a bit stiff

Please tell me these two cases are one off's its very worrying, as accountants we could be walking into a minefield and not know it.  

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28th Jan 2015 14:00

Getting out

When I read reports like this my approaching retirement looks ever more attractive. I don't know about a minefield - it feels more like a shooting gallery with me as the target. Right in the middle of the silly season three new investigations with unreasonable deadlines. The Revenue have really lost sight of the ball.

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28th Jan 2015 14:12

Minefields are okay if you are aware you are in one, if not it can become a turkey shoot (shooting gallery), and guess who is the turkey.

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28th Jan 2015 14:08

The thing with deadlines

is that you can actually appeal against them. You can't appeal against a notice to supple docs but you can against the deadline.

So if you know that say in Jan you will be tied up, then appeal with the reason and state a date when you know you will be able to complete. Puts the ball back in your court.

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28th Jan 2015 14:14

After the Knee Jerk!

Charging VAT when not in possession of a current VAT number is hardly "A Mistake": it is a potential criminal offence.

I would have advised the client:

1.  To instruct their adviser to write: using Special Delivery which then should produce an audit trail:

2.  To attempt registration on the client's behalf via the delegated authority:

3.  To keep a precise event chain file record: and, finally,

4.  Not to levy VAT on revenue outputs until such time as they had achieved formal registration.

OK; so if the client company had exceeded the compulsory registration threshold and had not advised HMRC, then they would be wrong.

However failing to register in time is a lesser offence, which could have been ameliorated and mitigated by proving their logged attempts to register.

In the second case of trying to evade IHT, (since the supposed gift occurred  within the seven year exemption rule) it was a clear case of attempted evasion; surely?

Since all too often, taxpayers avoid professional counsel and believe their laissez faire approach can be later talked out of, the old legal tenet of volenti non fit injuria, rather applies!

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28th Jan 2015 16:42

Both of the two linked cases appear like HMRC is trying to use its power to impose penalties instead of launching criminal charges. In both cases the taxpayer (or should I say 'attempted non-taxpayer) took a course of action that, through deliberate non-disclosure or otherwise, reduced the amount of revenue collected. I am personally quite surprised and disappointed that, at least in the case of Hutchings, criminal charges were not laid.

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28th Jan 2015 17:41

Wrong sort of shocking

The two cases appear to be a different sort of shocking to that intended by the article. As others have said, what is shocking is that these people have ONLY received penalties, not more severe punishment.

For the assertion that penalties are a trap for the unwary, we really need case studies that show the unwary being trapped. Lucam was, at best, foolish, not unwary (not charging VAT without a VAT number is one of the clearer parts of HMRC guidance). Hutchings was not unwary at all, but someone who simply failed in what looks like deliberate evasion of tax. What case studies are available where someone has suffered penalties, which have been upheld, when it could be held they genuinely have an excuse for the failure?

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28th Jan 2015 19:37

No Sympathy due and no shocks here

Both of these cases are clear in law and I agree with stepurhan.

We do read of cases where the results are poor and where the taxpayer has a genuine reason that is not upheld.

Hiding an offshore account - come on - that is hardly HMRC being overzealous or shocking.  Charging VAT when you shouldn't - again that is hardly a shocking result.

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28th Jan 2015 22:56

tax laws

The other side of the coin. I submitted a request in writing on my letter headed notepaper. After some wait, I phoned HMRC asking for a reply. I was told that someone had mis copied my post code and the original had been returned as 'not known'. Instead of doing what I would term the natural thing, they simply did not bother to check that their details were correct, and sent me no more.

After reading the above, I feel thet I should be fining them for carelessness. 

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28th Jan 2015 22:58

tax laws

HMRC are not always correct.

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29th Jan 2015 09:16

Who got the VAT
Did they keep the incorrectly charged VAT or pay it over?

Assuming they paid it over to HMRC and whoever got a VAT invoice reclaimed it, where is the loss to HMRC?

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29th Jan 2015 18:11

Didn't pay the VAT

North East Accountant wrote:
Did they keep the incorrectly charged VAT or pay it over? Assuming they paid it over to HMRC and whoever got a VAT invoice reclaimed it, where is the loss to HMRC?

Well I think the issue is that they didn't pay it over to HMRC (you can't fill and pay a VAT return if you don't have a VAT number). When HMRC came knocking they'd also mislaid all of the records to show how much VAT they'd charged...

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30th Jan 2015 09:46

Serves them right

Will they get what they deserve.

Thought they might have added the vat to the fist return they did submit.

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30th Jan 2015 09:53

As HMRC

are short of cash they probably prefer heavy penalties to short prison sentences.

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