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.