Association of Accounting Technicians response to HMRC penalties: a discussion document

Association of Accounting Technicians response to HMRC penalties: a discussion document 1

Association of Accounting Technicians response to HMRC penalties: a discussion document 1. Introduction 1.1. The Association of Accounting Technicians (AAT) is pleased to have the opportunity to respond to the discussion document HMRC penalties: a discussion document, released 2 February 2015 (condoc). 1.2. This response is being submitted on behalf of AATs membership and from the wider public benefit of achieving sound and effective administration of taxes. 1.3. AAT s comments in this response are intended to add value or highlight those aspects that require further consideration. Opinion is provided on the operational elements of the proposals along with the practicalities in implementing the measures outlined. Furthermore, observations reflect the potentially disproportionate impact that the proposed changes would have on SMEs and micro-entities, many of which employ AAT members or would be represented by AATs operationally skilled members in practice. 2. Executive summary 2.1. AAT recognises that the issued discussion document is stage 1 of the process being conducted in line with the Tax Consultation Framework and therefore a high level of observation is made at this stage. 2.2. This high level response looks at inconsistencies which have become apparent between penalties based on legislation passed many years before the merger of Inland Revenue and HM Customs and Excise. 2.3. AAT acknowledges HMRC s concerns (4.2 condoc) as to fairness and proportionality in the current operation of penalties and in the responses below highlights particular examples where independent judges at tribunals consider these principles are not applied. Although some of these decisions were later reversed by the Upper Tribunal based on pre merger legislation, the independent Tribunal criticisms form a marker for the reform of the penalties regime. 2.4. The discussion document looks at how HMRC currently applies penalties and is considering changes to the penalty system with the aim of moving from services that are based around traditional tax regimes to services which: 2.4.1. Are based around the whole customer and not based around specific tax regimes (5.1, condoc). 2.4.2. Are easy to use, convenient and personalised for individuals, businesses and agents. 2.4.3. Promote digital take-up and voluntary compliance by designing for customer needs. 2.4.4. Use data to help customers avoid errors through pre-population. 2.4.5. Provide assistance in using or accessing HMRC services for those who need it. 2

2.4.6. Allow HMRC to consult customers on policy proposals and changes in order to improve them. 2.4.7. Enable HMRC to risk assess customers based on past tax compliance across all tax regimes. 2.5. AAT further supports the conclusion reached by the Office of Tax Simplification (OTS) (4.12, condoc) that there needs to be a full post-implementation review of the HMRC Powers Review work in respect of penalties and gives the following opinions as to how that might be achieved 3. AAT response to the discussion paper on HMRC penalties: a discussion document Q1: To what extent are the concerns expressed above typical of actual situations? 3.1. In Part 4 (condoc), HMRC explains some of the concerns raised by stakeholders on the present penalties system. AAT has identified the following concerns (3.3-3.18, below) as typical of actual situations and to give more detailed examples of some Tribunal cases which are in the public domain have been used. 3.2. The Powers Review considered that penalties should be fair and proportionate and subject to appeal (where they cannot be overturned by taxpayer action) (3.6, condoc). HMRC penalties are based on HMRC principles set out at 5.3 (condoc) which state penalties should be proportionate to the offence and may take into account past behaviour. However, AAT has concerns that these principles are not always applied and give examples from the following publicised cases. 3.3. The importance of fairness and proportionality (4.2, condoc) is an example of where a taxpayer can be faced with accumulated penalties on a technical issue but owe no tax, as in the Laithwaite case. In this case no tax was owed but the taxpayer had not understood certain CIS requirements of an installer of a new kitchen to a domestic customer. The original determination 21,600 was mitigated by HMRC to 7,381 and reduced by First Tier Tribunal to nil. 3.4. The case of Gary Laithwaite V HMRC [2014] UKFTT 0759 TC is an example of the rigidity, particularly the rigid operation of Section 98 of the Taxes Manages Act 1970, of the current Construction Industry Scheme (CIS) penalty system which the tribunal held to be disproportionate. 3.5. As regards the proportionality of the penalty, in the case of Anthony Bosher v HMRC [2012] UKFTT 631 (TC) the First Tier Tribunal considered that penalties, after revision by HMRC under S102 TMA 1970 Mitigation of Penalties, were disproportionate. The original determination of accumulated penalties was 64,400. This was mitigated by HMRC under Section 102 TMA to 14,600. Then this was reduced by First Tier Tribunal to 6,287. On appeal by HMRC, the Upper Tribunal overturned the decision of the First Tier Tribunal on the technicalities that there are legal limitations to an appeal under Section 98A. The Upper Tribunal explained that: There is no appeal against HMRC s decision on S102 mitigation and a taxpayer wishing to litigate would need to seek Judicial Review. Paragraph 13, Revenue and Customs Commissioners v Bosher [2013] UKUT 0579 (TCC). 3.6. The issues identified in paragraphs 4.6 and 4.7 of the condoc in relation to the current VAT default surcharge system (complacency caused by an initial warning rather than a financial penalty and no differentiation made between payments that are one day late from payments that are many months late) reflect practical problems with the current system. 3

3.7. The HMRC policy of not issuing a surcharge at the 2% and 5% rates if the amount concerned is less than 400 (paragraph 4.5 of the July 2013 edition of VAT Notice 700/50) can result in taxpayer complacency. AAT is concerned that the effect of this policy is that some taxpayers receive the first financial penalty when the surcharge is at the 10% rate. 3.8. The significant number of appeals made to the First Tier Tribunal in relation to VAT default surcharges suggests that there is a perception among many taxpayers that the system imposes penalties that are unfair and disproportionate. 3.9. In Enersys Holdings UK Ltd v HMRC [2010] UKFTT 20 (TC), the Tribunal decided that a surcharge at the 5% rate resulting in a penalty of 131,881 for a VAT return and payment submitted one day late was disproportionate. In Trinity Mirror plc v HMRC [2014] UKFTT 355 (TC), the Tribunal decided that a surcharge at the 2% rate resulting in a penalty of 70,906 for a VAT return and payment submitted one day late was disproportionate. 3.10. AAT is of the view that Judicial Review is a disproportionately expensive remedy for a taxpayer to appeal against a penalty which the taxpayer considers to be disproportionate to the tax at risk and that an appeal to the First Tier Tribunal should be allowed against a mitigation decision under Section 102 TMA, in accordance with the principle at 3.6 (condoc) subject to appeal (where they cannot be overturned by taxpayer action). 3.11. The Tribunal cases relating to the CIS (3.4-3.5, above) are examples of how cumulative penalties can become excessive. 3.12. In addition to the observations made above there is yet another inconsistency in respect of a taxpayer s ability to appeal on proportionality between VAT and direct taxes highlighted in the decisions in Bosher and Enersys and Trinity Mirror. 3.13. HMRC has raised the issue of automated penalties in 4.3 (condoc). AAT notes that in many cases automated penalties accord with the guidance of the Powers Review (3.6, condoc) as effective, simple and cost effective to administer. 3.14. Appendix A3 (condoc) further reports the Powers Review, describing the 100 penalty for the first offence as a broadly harmonised approach to late filing, and pointing to the greater ease of understanding for customers with a clear, consistent and easily understood penalty. 3.15. AAT does appreciate the need for automated penalties which extend to a large number of the population. The 100 penalty for failure to complete a return by 31 January is an example of the successful use of an automated penalty preceded by publicity. The initial sum of 100 might be comparatively small by 2015 standards but it concentrates the mind, as evidenced by the exceedingly busy period in accountants offices to meet the 31 January deadline. AAT believes that HMRC should consider this to be a success even though it may be more costly and resource intensive for HMRC to pursue (4.3, condoc). The withdrawal of the penalty would remove the deterrent effect and is likely to result in a larger number of tax returns subsequently failing to meet the deadline. 3.16. On the other hand, automated penalties can also catch some taxpayers unaware if they are caught by an accumulation of these penalties in a complex situation like CIS. It is a legal doctrine that ignorance is no excuse under the law 1, however, there are thousands of words of instruction on the HMRC website, but these can be out of sight of the unwary and many ordinary tradesmen are rarely up to date in respect of tax law. In criminal law, although ignorance may not clear a defendant of guilt, it can be a consideration in sentencing and this principle could be extended to penalties. 1 Presumed knowledge of the law is the principle in jurisprudence that one is bound by a law even if one does not know of it. It has also been defined as the "prohibition of ignorance of the law". The concept comes from Roman law, and is expressed in the brocard ignorantia legis non excusat. 4

3.17. The Tribunal in Hok Ltd V CIR [2011] UKFTT 433 (TC) criticised HMRC system of waiting until 4 months have gone by causing a build up of automated penalties which caught the company (which considered it was acting correctly) by surprise. The Tribunal considered this was unfair. 3.18. AAT agrees with the sentiment at 4.5 (condoc) that the reasonable excuse rules may need updating to better support those genuinely wanting to comply, especially the difference between HMRC considerations (which bind HMRC staff) and those allowed by the tribunal from time to time. Q2: What do you consider to be the major areas of concern with our penalty regimes? 3.19. AAT considers the following to be the major areas of concern with HMRC penalty regimes: 3.19.1. Inconsistencies in penalties between VAT and direct taxes, as identified by Tribunal cases of Laithwaite, Enersys and Trinity Mirror plc. 3.19.2. Fairness and proportionality (see our response to Q1, 3.4 & 3.5, above). 3.19.3. Inability of revenue officers bound by inflexible instruction manuals to consider particular circumstances which are later highlighted by the Tribunal but before matters progress to the Tribunal with costs to the appellant and HMRC (see the case of Laithwaite v HMRC in response to Q1, 3.4 & 3.5, above). 3.20. HMRC s Alternative Dispute Resolution team has stated that cases involving a penalty discussion where the penalties were imposed according to HMRC instruction manual cannot be considered for Alternative Dispute Resolution (ADR). This then involves a full hearing before the Tribunal which has more flexibility and is not tied to either party but whereby costs accumulate to both parties. AAT recommends that consideration should be given to increasing the scope of ADR to penalties. Q3: What do you view as being the priority areas for the initial focus of this work? 3.21. AAT considers that the planned digital proposals are dependent upon HMRC s ability to modernise their computer system away from services that are based around traditional tax regimes to services designed around customers AAT fully supports this commitment, however it is AAT s firm view that there is a real risk that this will take many years. 3.22. AAT considers that the priority areas are those which can be modified by legislation or internal policy such as developing fairness and proportionality, for example introducing an appeal process to Section 102 TMA to accord with the Powers Review Principle reported at 3.6 (condoc) that penalties should be fair and subject to appeal (where they cannot be overturned by taxpayer action) and rectifying the changes to the CIS systems mentioned at Q1 (3.4-3.5, above). 3.23. AAT considers that the lack of flexibility is a priority and recommends that HMRC be given the legal powers to apply greater discretion to genuine reasons for missing a deadline or expectations by customers who have had a good past record of compliance but for some reason have been caught unaware of some requirement in the voluminous legal rules. 3.24. AAT recommends that HMRC s interpretation of reasonable excuse needs to be widened to accord with Tribunal decisions. As 4.5 (condoc) acknowledges, the current system makes no distinction between a customer who misses a deadline by a day or two and someone who has made no attempt to comply at all. There are reasonable excuse provisions that can remove penalties, but the rules may need updating to better support those genuinely wanting to comply. 5

3.25. AAT notes that in 4.9 (condoc) it expresses concern on the behavioural penalties for inaccuracies and other failures which aim to take account of the behaviour of the customer, whether this was careless or deliberate and how they have complied in the time leading up to the inaccuracy or other failure. AAT notes that these references to behaviour are mainly to be found in Schedule 24 FA 2007, with the extension by Finance Act 2008 and 2009 now apply to most taxes, duties and levies. 3.26. Previous to FA 2007, acknowledgement of behaviour in respect of penalties were applied by sections 95 and 96 to direct taxes and many practitioners say this former legislation was more flexible in the range of behaviours considered. However, the consideration for the amount of penalty in s.95 and s.96 was by behavioural factors publicised as policy by HMRC whereas current statute defines behavioural considerations, which accords with HMRC s concern expressed at 4.9 (condoc) for the need to ensure these are applied case by case on a consistent basis. 3.27. Any changes to be made would need to take account of and be dependent on HMRC s development of IT capability, as acknowledged in 5.10 (condoc). Given that the development of HMRC s computer system will take time, AAT considers that a priority is an early start to the legal planning to achieve the objective envisaged by 5.8 (condoc) of a penalty system that is based on the overall position of the customer rather than applying penalties on a tax-by-tax basis as currently applied. 3.28. The legislation will need to be amended in order to achieve the aim also acknowledged in 5.10 (condoc) that any changes to HMRC s penalty regimes would follow the usual policy development process and need primary and secondary legislative changes. As part of that process, HMRC would follow the tax impact assessment process, and build a good understanding of the possible impact on customers businesses and individuals the Exchequer and HMRC. Q4: Do you agree the principles set out at paragraph 5.3 should govern the design of our penalty regimes? If not what other or additional principles should apply? 3.29. AAT does agree that the principles set out at paragraph 5.3 (condoc) should govern the design of HMRC penalty regimes, which are: 3.29.1. Not applied with the objective of raising revenues, but to be designed from the customer perspective to encourage compliance and to prevent noncompliance. 3.29.2. Proportionate to the offence taking into account past behaviour. 3.29.3. Applied fairly, ensuring that compliant customers are in a better position than the non-compliant. 3.29.4. A credible threat and cost efficient. 3.29.5. Although there is a standard and consistent approach, individual variations should take into account customer behaviour and particular taxes. 3.30. AAT supports the view set out in 1.1 (condoc) of whether we could better differentiate between deliberate and persistent non-compliers with those who might make an occasional error for whom alternative interventions are more appropriate Q5: Do you think that an approach which focused more on individual behaviour would help? 3.31. AAT would support an approach to penalties which focuses more on individual behaviour to improve the penalty regime which would help to achieve the five principles outlined at 5.3 (condoc). 6

3.32. Digital developments are changing the consumers expectations not only in retail but across a range of services. The consideration outlined in 5.8 (condoc) of a personalised digital tax account allocated to customers showing all taxes appropriate to them would indicate HMRC s aim to keep up with consumer expectations. AAT supports and encourages HMRC to progress in this direction. 3.33. AAT is pleased to note HMRC s future plan to make greater use of behavioural and customer understanding, and to use their digital capability to communicate with customers in a more targeted and individualised way. (5.1, condoc). 3.34. In 5.2 (condoc) HMRC seeks the thoughts, ideas and comments of customers and stakeholders on HMRC s considerations on whether penalties could also be applied in a more sophisticated and customer-focused way and how the administration of penalties could be updated. AAT agrees that penalties should not be applied for an uncharacteristic failure by an otherwise compliant customer. AAT s view is that HMRC s response to those who make a simple mistake when entering a particular tax regime for the first time should be a considerate response by reaching out to those taxpayers who may need extra help. 3.35. AAT is of the opinion that a customer s compliance with each of their obligations should be considered overall and that penalties should take account of their behaviour as a whole. 3.36. AAT favours greater use of suspended penalties under para 14 Sch 24 FA 2007 which could focus on individual behaviour. Whereby the penalty for carelessness is calculated and the taxpayer is aware of the exact amount that is suspended. The taxpayer will be advised of what action is agreed to be taken over the period of suspension, which statute states as not to exceed two years. 3.37. AAT considers that Schedule 24, paragraph 14, which gives HMRC the discretion to suspend for up to two years all or part of a penalty for careless action, provides a model for focussing on individual behaviour which could be applied to other penalty situations. The suspension scheme legislation sets out the mechanics of how this would happen and how the penalty can be cancelled or become payable depending on the taxpayer s subsequent behaviour in following years. 3.38. It is AAT s view that the VAT default surcharge legislation at s.59 VATA 1994 is another example of penalty application in response to individual behaviour, whereby an initial failure to comply in a 12 month period attracts a warning rather than a penalty. Successive failures then attract stiffer penalties. As 4.6 (condoc) acknowledges, this approach gives customers an opportunity to recognise, and put right, problems in their filing process, before they risk incurring a large penalty. However, as 4.6 (condoc) also acknowledges that, in some cases it can have the opposite effect, so that customers simply ignore the early warnings and fail to act until they receive a large penalty. As noted (3.11, above) the 100 penalty for failure to submit a self-assessment return by 31 January following the end of the tax year is an example of the successful use of an automated penalty preceded by publicity. AAT suggests that a fixed 100 penalty, issued automatically and immediately for each failure to submit a VAT return on time would be more appropriate than the current VAT default surcharge system. An additional penalty of, for example, 1% of the VAT payment due for each complete 30 day period that a VAT payment is late, could be imposed in relation to late VAT payments. 3.39. AAT supports HMRC s aim towards modernising the tax system to embrace a focus on more individual behaviour and agree that this would also involve more standardisation of penalty rules. AAT supports the introduction of new digital services that make it easier for customers to get things right first time. 3.40. AAT supports HMRC s vision to put customers at the heart of everything we do, to be user-friendly and efficient as possible, which also means making tax policy simpler and easier for people to understand moving away from services that are based around 7

traditional tax regimes to services designed around HMRC customers. (1.3 &1.4, condoc). 3.41. AAT considers that digital modernisation envisaged above would enable penalties to focus more on individual behaviour. Q6: What would be the impact if we were to remove penalties for 'short' failures (a day or two late) and how would we incentivise compliance (would a higher interest rate work for example)? 3.42. AAT has concerns over the removal of penalties for 'short' failures, which are a day or two late, as in AAT s view there is the danger that giving a couple of days grace before applying penalties will simply be seen as postponing the due date and moving all the current concerns on a few days. 3.43. AAT foresees other considerations: 3.43.1. HMRC has stated their aim of increased use of automation and to reduce resources. Taxpayer appeals against missing deadlines would further occupy HMRC resources through increased consideration by HMRC of various representations made by taxpayers (4.3, condoc). 3.43.2. An automated system which assessed the penalty on a computer digitised appraisal of customer behavioural record could be seen as discretionary and lacking in transparency. 3.44. AAT is not in favour of the deployment of a higher interest rate (posed in the question) because interest is considered to be commercial restitution based on Treasury assessment of general interest rates above base rate. While these may currently seem low by historic standards future interest rates may be raised in line with economic conditions. Also the Powers Review (reported in 3.6, condoc) said that penalties should be separate from interest. 3.45. On the other hand AAT sees merit in using technology to remind taxpayers in the envisaged interpersonal medium that there has been a failure which will attract higher penalties. Q7: What do you think should trigger a penalty? 3.46. AAT considers that the following should trigger a penalty: 3.46.1. An error in a return or other incorrect document due to a failure to take reasonable care and where there is no reasonable excuse. 3.46.2. An error or other incorrect document due to deliberate action. 3.46.3. Failure to notify chargeability. 3.46.4. Handling goods subject to unpaid excise duty. 3.46.5. Vat and excise wrongdoing as defined in Finance Act 2008, Schedule 41. 3.46.6. Failure to comply with a statutory obligation such as submitting a return or making a payment by a specified date or keeping records. 3.47. AAT agrees with the Powers Review which considered that to be effective penalties should be set in statute. (3.6, condoc). 8

Q8: Are there incentives HMRC could consider to encourage compliance? 3.48. AAT considers that the discretion to suspend penalties for careless inaccuracy under paragraph14 Schedule 24 FA 2007 is an inducement to improve record keeping, whereby the taxpayer is aware of the size of the suspended penalty which HMRC can later cancel if the conditions for suspension have been complied with. AAT recommends that wider use may be made of suspended penalties. 3.49. It is AAT s view that that an easily understood and fair penalty regime would encourage compliance. The significant number of appeals against VAT default surcharges suggests that the VAT default surcharge legislation in Section 59 VATA 1994 is not easily understood or perceived as fair by taxpayers. 3.50. AAT suggests that HMRC might look at the practice of some gas, electricity and telephone companies which give a modest discount if payment is made by a certain date although this might only encourage the already compliant rather than the careless. 3.51. AAT recommends that consideration be given to the introduction of legislation which has a similar effect to regulation 34(3) of the VAT Regulations 1995 could be considered for introduction in relation to other HMRC returns. 3.52. Except in relation to VAT (for the reasons noted at 3.5 above) AAT sees merit in considering the progressive system similar to penalty points for motoring offences mentioned at 5.7 (condoc). This has the benefit of avoiding initial financial penalties, but applying more substantial penalties for more serious failures or for persistent noncompliance with obligations. HMRC s development of digital communications would enable this to be operated through pre-programmed computerisation. Q9: What could HMRC do better to explain sanctions and the role penalties play within them? 3.53. AAT considers that the public s reaction to published avoidance by multi-national corporations and celebrities indicates a public hardening which extends to tax evasion. 3.54. AAT recommends that HMRC continue 2 to improve publicity of explaining the role of taxation to fund public services, the taxpayers obligations and the sanctions for noncompliance. Q10: If we were not to charge penalties in all the circumstances that we do currently, how could we still get a strong message across to our customers which they will take notice of? 3.55. AAT agrees that a strong message is required to be delivered to taxpayers explaining their need to comply (even if there is no tax involved) and the penalty consequences if they don t. 3.56. Given the inexorable move towards digitisation, as referenced at 1.5 & 1.6 (condoc), HMRC must look to notify warnings of penalties through appropriate digital channels as well as providing a framework for digital dialogue for appeals and follow up engagement. 3.57. AAT supports the suggested use of the incentives mentioned at Q8 above, including Finance Act Schedule 24, paragraph 14 of the system of suspended penalties and possibly the cancellation of a stated amount of penalty, and also the concept of penalty points followed by a heavier penalty if appropriate. 3.58. The distinction between the above and no penalty contact is that the taxpayer is put on notice of the consequences of non-compliance. These may be dependent on the development of the personalised digitalisation referred to in the condoc. 2 To recognise that HMRC already publicises these issues. 9

3.59. AAT favours the general objective of the Schedule 41 Finance Act 2008 (Penalties for failure to notify and certain VAT and excise wrongdoing) to target taxpayer behaviour more effectively and as Annex A30 reports if a person makes a full unprompted disclosure of a non-deliberate failure to notify within 12 months after tax first becomes unpaid, there is no penalty. Q11: To what extent does the present penalty regime help agents and advisers to influence their clients compliance, and how might this be different if we were not to charge penalties in all the circumstances that we do currently. 3.60. AAT considers that the present penalty regime does help agents and advisers to influence their clients compliance by reminding clients of the possible consequences of non-compliance in a range of circumstances from providing records and other data in time to complete returns by the due date to advising clients whose returns may be under enquiry of the benefits of cooperation and the consequences of failure to make a full disclosure. 3.61. Where there might be a change in the penalty regime whereby HMRC did not opt to charge penalties in all the circumstances that they do currently, the agent would need to comment on the new situation, for example in the case of the suspended penalty mentioned at Q8, the consequence of a penalty of a particular amount becoming payable rather than cancelled, and in the case of the penalty points that the client is on notice for a heavier non-compliance penalty. Q12: Do you have any comments on the likely impact of any changes, or can you contribute to our evidence base? 3.62. AAT welcomes the modernisation to the penalty regime outlined in 1.4 (condoc) et seq., with beneficial consequences for the customer and for compliance by: moving away from services that are based around traditional tax regimes to services designed around our customers.to make it simpler, quicker and easier for them to pay the right tax at the right time.by using more accurate, up-to-date data with a more real time view of a customer s tax and benefits affairs, by introducing services that make it easy for customers to reduce errors and get things right, through pre-population, saving them and HMRC time and money. 3.63. AAT notes the aim expressed at 4.10 (condoc) With new digital ways of working increasingly making it quicker and easier for customers to deal with us online, we want to ensure our system adapts to this new way of working. 3.64. AAT considers that penalties need to continue to be defined in statute and that increased digitalisation need not be a barrier to progress. 3.65. AAT would like to draw attention to the fact that online filing has replaced most of the old paper and personal contact. This has relied primarily on, in the first instance, trust subject to the HMRC check programme. 3.66. AAT would recommend that more enquiry casework could be settled by an online offer accompanied by a full report to justify decisions on adjustments and penalty levels. Precedents for online compliance offers to include appropriate penalties have been part of HMRC s Campaign programme. 3.67. AAT envisages that the recommendations outlined at Q8 (3.42-3.45, above) would have a beneficial impact on compliance. 3.68. By contrast, AAT would comment on the negative impact of the unfairness of multiple CIS penalties, which can currently catch an unsuspecting customer unaware with a large 10

accumulated penalty, with a possible similar regime in 2015/16 for non-compliance of some of the complications of RTI by a small employer. 3.69. Finance Act 2009 Schedule 55 replaced s.98 A as the penalty for certain failures but A41 in Annex A (condoc) gives the following examples of failed obligations for which Section 98 applies: 3.69.1. Employers obligation to provide an annual return of other earnings (Forms P11D and P9D). 3.69.2. Contractors in the Construction Industry obligation to provide subcontractors with written information of payment and deductions made. 3.69.3. Obligation for contractors to include declarations that they have verified the payment status of subcontractors they have paid, and that they have considered their employment status to make sure payments have not been made under contracts of employment. 3.70. The Upper Tribunal in the Bosher case (see Q1, 3.5, above) explained the legal limitations on appeals against S98. AAT considers the legal limitations outlined by Bosher to contradict the Powers Review Principle reported at 3.6 (condoc) that penalties should be fair and subject to appeal (where they cannot be overturned by taxpayer action). S98 also provides for penalties for offences which do not have their own penalty provisions. (A40, Annex A, condoc) 3.71. In 2005 Inland Revenue merged with HM Customs and Excise where each department had their own traditions, customers and penalty structures, as 3.5 (condoc) acknowledges the Powers Review added further levies and taxes to the penalty structure (Finance Act 2008 Schedule 40). 3.72. AAT notes that from 2000 there have been considerable changes to the interface between HMRC and the customer. HMRC are expected to proportionately reduce in size and optimise digital interaction. Additionally, online interface is the growing preference of customers in society. HMRC invited AAT to participate in the design of its Agent Strategy back in 2011. Since then there have been regular developments, and AAT continues its input to the further development of HMRC's Agent Strategy. 3.73. AAT welcomes HMRC s wish to open a discussion to review the penalty regimes which have been assembled in a comparatively short time (as compared to historic taxation legislation). AAT acknowledges that the penalty regimes are now challenged by the above mentioned structural, consumer and technological changes over a comparatively short space of time since 1996, such as cumulative and automated penalties, problems such as proportionality and other concerns acknowledged in 4.3 (condoc). 3.74. AAT further shares the OTS conclusion (4.12 condoc) that there needs to be a full postimplementation review of the HMRC Powers Review work in respect of penalties. 4. Conclusion 4.1. AAT supports HMRC s aims in exploring the way penalties are currently applied when people fail to meet their tax or entitlement obligations and at 3.40 (condoc). 4.2. AAT further supports HMRC s vision to put customers at the heart of everything we do, to be user-friendly and efficient as possible, which also means making tax policy simpler and easier for people to understand moving away from services that are based around traditional tax regimes to services designed around HMRC customers. 11

4.3. AAT considers that HMRC need to tackle fairness and proportionality (3.4-3.5, above) and AAT s view is that the lack of flexibility is a priority (Para 3.23) as is the widening of HMRC s interpretation of reasonable excuse (3.23) 4.4. AAT contrasts positive views on automated penalties in paragraph 3.15 against a situation where automated penalties can catch a taxpayer unaware by accumulation of automated penalties in a complex situation (3.16, above). 4.5. AAT recognises that digitalisation will take time and funding but legislative changes are a priority (3.27, above). 4.6. AAT recommends a focus on legislative and other means to focus more on individual behaviour and encourage compliance: 4.6.1. Greater use of suspended penalties (3.36, above). 4.6.2. Suspend penalties for careless inaccuracy under paragraph14 Schedule 24 FA 2007 (3.48, above). 4.6.3. Except in relation to VAT (for the reasons noted at 3.5 above) greater use of legislation like the VAT default surcharge in Section 59 VATA 1994 (3.49, above). 4.6.4. Consideration of incentive such as some gas, electricity and telephone companies which give a modest discount if payment is made by a certain date. (3.50, above). 4.6.5. Wider consideration on practices such as the current VAT facility which enables a customer to correct an error of up to 10,000 by making an adjustment to the next available VAT return (3.51, above). 4.6.6. AAT believes there to be merit in considering a progressive system similar to penalty points for motoring offences mentioned at 5.7 (condoc) which has the benefit of avoiding initial financial penalties, but applying more substantial penalties for more serious failures or for persistent non-compliance with obligations (3.52, above). 4.6.7. The general objective of the Schedule 41 Finance Act 2008 (Penalties for failure to notify and certain VAT and excise wrongdoing) to target more effectively on taxpayer behaviour and as Annex A30 reports if a person makes a full unprompted disclosure of a non-deliberate failure to notify within 12 months after tax first becomes unpaid, there is no penalty, (3.59, above). 4.7. AAT recommends that more enquiry casework could be settled by online offers accompanied by a full report to justify decisions on adjustments and penalty levels (3.66, above). 4.8. AAT further shares the OTS conclusion (4.12 condoc) that there needs to be a full postimplementation review of the HMRC Powers Review work in respect of penalties. 5. About AAT 5.1. AAT is a professional accountancy body with over 49,800 full and fellow members 3 and 78,400 student and affiliate members worldwide. Of the full and fellow members, there are over 4,100 Members in Practice who provide accountancy and taxation services to individuals, not-for-profit organisations and the full range of business types. 3 Figures correct as at 31 March 2015 12

5.2. AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound and effective administration of taxes. 6. Further information If you have any questions or would like to discuss any of the points in more detail then please contact AAT at: email: consultation@aat.org.uk and aat@palmerco.co.uk telephone: 020 7397 3088 Aleem Islan Association of Accounting Technicians 140 Aldersgate Street London EC1A 4HY 13