HMRC Penalties: A Discussion Document The Law Society's response May 2015 2015 The Law Society. All rights reserved.
Introduction 1. This response has been prepared by the Tax Committee of The Law Society of England and Wales ( the Society ). The Society is the professional body for the solicitors profession in England and Wales, representing over 160,000 registered legal practitioners. The Society represents the profession to parliament, government and regulatory bodies and has a public interest in the reform of the law. 2. The Law Society welcomes this opportunity to respond to HMT and HMRC's consultation document entitled "HMRC Penalties: A Discussion Document", released on 2 February 2015. 3. In general terms, the proposals in the document seem reasonable, and we are pleased to be able to comment at Stage 1 of the process. It is interesting that HMRC are placing their review of the penalty regime firmly in the context of their digital plans, which it is said will make it easier for taxpayers to comply with their tax obligations and allow the use of more accurate data across all taxes, e.g. for the purposes of pre-populating tax returns. We wonder if the move to online tax reporting/collection and less face to face contact with HMRC will result in taxpayers making more minor errors, necessitating a more proportionate approach to when penalties are applied and whether this underpins HMRC s desire to look again at the question of penalties. There is nothing more off-putting for a taxpayer who is trying to be compliant than to receive a penalty for failing to meet a time-bound or regulatory obligation simply through ignorance or innocent error. This can, as is noted in the document, have an effect which does not promote compliance. It also has to be remembered that taxpayers may suffer fines or penalties from other quarters at the same time, so for example a taxpayer's company might get a fine from Companies House for not getting its accounts filed on time and at the same time suffer an HMRC compliance related fine. The owner/director may deserve both, but it may also be his first year in business and he may be struggling to come to terms with the various pressures that a business in the first years faces. 4. We were involved quite closely in the previous consultation relating to penalties from 2005 onwards. At the time there were various fundamental discussions about such matters as divorcing the provision of information, particularly, but not limited to, tax returns from the payment of the tax and having penalties which applied to each matter independently. We ended up with the current system of the 100 penalty if a self-assessment return is not filed on time. This is discussed in more detail later but there were on several occasions discussions of "parking fine" analogies in other words if returns are late but not very late the fine which would otherwise be levied is reduced. It might be useful to reconsider issues such as these in the digital context. 5. If there can be greater "live" engagement with the taxpayer in the digital age might we suggest that the HMRC website has the equivalent of livechat you now get on a lot of websites so people can talk to an operator (almost by SMS) within the site? 6. Question 1 To what extent are the concerns expressed [in Chapter 4] typical of actual situations? As lawyers we come across actual situations of penalties being imposed less frequently than the accountancy profession. However we agree with many of the concerns expressed in Chapter 4. As can be seen from cases on penalties we also
agree with the comments relating to automated penalties. It would be preferable to have penalties which are more closely designed to affect behaviour and promote compliance. In relation to 4.4 there is an argument for a penalty being cancelled if no tax was owed of course this raises the usual problem about information in that HMRC cannot know whether there is no tax owed unless and until they receive a return which gives them the information to work this out. A different problem might be the number of occasions when taxpayers have to file returns even though no tax is due. Having said this, to charge where no tax is due gives the appearance that a penalty is a revenue raiser. 4.5 brings us back to the "parking ticket" discussion. The Law Society felt quite strongly during the Powers Review that a parking ticket approach might have a positive effect on compliance and was something that members of the public could readily understand. But any system has to be simple in order to be understood and effective. 7. We agree with the comments in Chapter 4 in the context of VAT/duties. Whilst there are elements of proportionality in the manner in which the VAT default surcharge operates, e.g. the initial warning rather than moving straight to applying a penalty, the problem with this approach remains that when the default surcharge does fall to be applied, it is applied mechanistically and without regard to the nature/extent of the failing. It should be the case that taxpayers have the ability to request mitigation of default surcharge by reference to clear guidelines established by HMRC, rather than just relying on reasonable excuse/hmrc s exercise of its care and management powers not to collect minor amounts. The same goes for excise, where the penalty is a % of the duty, regardless of the reason underlying the penalty being applied. 8. 4.7 - Part of the problem for VAT is the system does not draw a distinction between normal and abnormal supplies eg if you have a one-off real estate/other sizeable supply in a period where you make a default the penalty is increased just because of the level of supplies without recognising the one-off supply itself may give difficulties and the arbitrariness of the penalty being higher than if the one off had occurred in a (non-defaulted) prior or subsequent period. 9. In relation to paragraphs 4.9 and 4.10 the review of the penalties for careless and deliberate behaviours was quite controversial at the time, particularly because of the desire within it to take away from individual inspectors any discretion in negotiating. We felt at the time that there was some inbuilt unfairness in this system and that some of the terms were misleading particularly the concept of "deliberate" which could be misconstrued. We are not entirely sure how an alteration to a digital system would affect penalties for careless and deliberate behaviours; if this resulted in greater flexibility as to how the penalties were applied this might encourage compliance. 10. Question 2 What do you consider to be the major areas of concern with our penalty regimes? We consider these to be:- (a) (b) penalties arising for taxpayers when they could not have known they were in default; time based or other penalties which have the effect of deterring rather than encouraging compliance; and
(c) a system with very little flexibility which is not tailored to a taxpayer's needs and so which does not promote compliance. 11. From a VAT/duties perspective the main priorities would be to adjust the system so that it operates in a more proportionate manner across penalties/default surcharge, looking at a number of factors including number/seriousness of breaches of reporting/payment obligations, tax at stake, cooperation/disclosure by taxpayer etc. We agree broadly with the principles espoused in chapter 5 of the document, including the need to take account of the interaction between penalties and late payment interest. We also think it would be helpful to take this approach with a view to reducing the number of appeals that taxpayers have to make, e.g. as to whether there was a reasonable excuse in a VAT default surcharge situation. 12. Question 3 What do you view as being the priority areas for the initial focus of this work? We would have thought that the issues raised in paragraphs 4.2, 4.3, 4.4 and 4.5 were the areas where there should be some initial focus for the work. This might then have an effect on how the default surcharge is operated. 13. We would agree that there are attractions in being able to look at taxpayers wider compliance position, e.g. where a taxpayer is generally compliant across all taxes, a minor failing on the VAT side could be subject to a lower penalty than the same failing by a taxpayer who has had historic issues around compliance more generally. 14. Question 4 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? Those principles do look to be appropriate to us. Past behaviour should, we take it, include past good behaviour. Also in relation to point 4 is collection of a penalty as important as the issue of when it should be applied? We accept, of course, that it should be collected, but this should not perhaps be an overriding factor. 15. Generally it will be necessary to ensure compatibility of any changes on the VAT/duties side with EU law/jurisprudence as well as taking account of human rights considerations. That said if the aim is to target penalties in a more appropriate fashion and ensure that they are proportionate to the nature of the tax obligation breached, one would expect this should assist. 16. Question 5 Do you think that an approach which focused more on individual behaviour would help? We would agree with this, but are concerned that it may take considerable time for systems to be developed or bed down to achieve this. For example, RTI for businesses with under 50 employees has only recently been introduced this may cause significant issues for SMEs and have penalties implications. 17. Question 6
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)? We would (perhaps reluctantly) say that the hard deadline of 100 fine if the return is not in by 31 January (for example) is readily understood. We believe that simplicity is the best way forward and a proposal of this type might not deliver it however a reduction to a lower figure if the return is put in within a few days might encourage compliance. A rebate may incentivise compliance where the 100 fine could be recovered if the tax payer filed the next two returns by the due deadline. While this might be seen as rewarding behaviour that a taxpayer was required by law to perform, it might reduce the perception that penalties are designed to be revenue raising. 18. Question 7 What do you think should trigger a penalty? - failure to submit a return on time (subject to a mitigation system for late but not too late reporting or late reporting when no tax is due etc); - failure to pay after a certain period beyond the due date. Careless and deliberate errors in reporting and responding to notices; - failure to report a source of income, although this needs quite a lot of discussion as a taxpayer may not realise he has to report it, particularly given the complexity of the modern tax system. 19. Question 8 Are there incentives HMRC could consider to encourage compliance? - the parking fine system (perhaps); and - early disclosure of information if this is a relevant factor, to reduce any penalties. 20. Question 9 What could HMRC do better to explain sanctions and the role penalties play within them? It is extremely difficult to find anything on the Gov website. Penalties really need a full internet page with links to detailed information. 21. Question 10 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? 5.10 - might we suggest with fewer obligations/more focus people will comply (it is usually the unexpected penalty for a small default which irritates). 22. Question 11
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? The present regime is over complex. While the regime does need to act as a deterrent is some cases, it should be capable of being explained. If you consider the Appendix to the consultation paper, which is an excellent summary, this reveals how complicated the system is. The question is whether this is all necessary and whether it achieves the objectives in 5.3. We have some doubts about this, as appears to be the view of HMRC. Might we suggest other penalties for SD than a 300 fine, as not being able to go on register where deals happen in quick succession or where HMRC do not return stock transfer forms (as now occurs more and more frequently) is a major problem? Question 12 Contact Details Do you have any comments on the likely impact of any changes, or can you contribute to our evidence base? We are unlikely to be able to do this save in relation to taxes such as stamp duty, SDLT, SDRT and perhaps VAT but would contribute to the extent possible. For further information about this response, please contact Richard Stratton (Richard.Stratton@traverssmith.com) or Renee Turner (Renee.Turner@LawSociety.org.uk)