In a recent article we drew attention to HMRC’s new ‘10 per cent minimum penalty’ for historical tax irregularities going back more than three years. Having urged HMRC to provide clarification as to the legal basis for its change of approach, we now understand HMRC’s view to be that this penalty has always been available for HMRC officers to invoke.
Our own experience suggests that, previously, such a penalty would only come into play as part of a restriction to the abatement of the prescribed penalty percentages set for each type of taxpayer behaviour. For example, where, after investigation by HMRC, a taxpayer is deemed to have failed to take reasonable care, a ‘prompted/careless’ penalty of between 15 per cent and 30 per cent would apply. The difference between the maximum and minimum amounts is then calculated in accordance with three ‘quality of disclosure’ factors - telling, helping and giving access. It seems that HMRC’s new interpretation accepts and follows this method of abating the penalty, but only for the most recent three years.
As HMRC now intends to restrict the abatement if more than three years of errors are in point, a new and worrying outcome might arise for those whose behaviour is found to be deliberate. This involves the potential application of the ‘naming and shaming’ or publishing details of deliberate defaulters (PDDD) rules, which took effect for deliberate irregularities arising after April 2010.
Where the tax found to be deliberately understated as a result of an HMRC investigation amounts to more than a cumulative figure of £25,000, the taxpayer falls within the criteria of the PDDD regime and is potentially ’named and shamed’ on HMRC’s website. The one statutory ‘get out’ for the errant taxpayer in these circumstances has been for the taxpayer to secure the maximum abatement for co-operating with HMRC – in other words, telling HMRC what is wrong, helping to correct matters and giving access to whatever records the department requests.
So, will the restriction to the maximum abatement result in more taxpayers being ‘named and shamed’ despite co-operation? The position is unclear. And will the new penalty approach disturb the current understanding? Or will PDDD not apply when – apart from the 10 per cent restriction – the maximum abatement would otherwise have been secured? This tinkering with the penalty guidance is confusing and we call on HMRC to provide further clarification.
For more information please comment below or get in touch with Mike Down.