HMRC tax penalties - not as straightforward as it seems

13 May 2017

There is no doubt HMRC has become more focused and aggressive in its approach to penalties. In fact, it is safe to say penalties is an area that takes a significant amount of an adviser’s discussion and review time to ensure that HMRC is working within the parameters set, and that clients are not being overly penalised.

There doesn’t seem to be a tax year commencing that doesn’t require taxpayers and their advisers to take account of some amendment, addition or reinforcement of HMRC’s penalty provisions. The current tax year is no exception, with recent secondary legislation bringing in further penalties relating to offshore matters and offshore transfers and the new penalty levels set out in Finance Act 2016.

Applying the rules

Trying to determine when HMRC may look to charge a penalty is not always as straightforward as it should be. Plus, even in circumstances when it is accepted a penalty is applicable, the level of that penalty and situations in which HMRC is prepared to suspend the penalty remain very unclear.

Our experience when dealing with different matters and different parts of HMRC is mixed, but generally that the regime is cumbersome and that there is a general reluctance within HMRC to give penalty suspensions. It is almost as though HMRC believes the suspension of a penalty should be an exception, whereas we believe suspension should be the norm and non-suspension the exception.

Our view is based on an understanding that the whole intention of the major changes in the penalty regime back in 2009 was to introduce more consistency and to support the drive to change taxpayer behaviour. However, it would appear HMRC’s application of the penalty regime is more about increasing the take for the Exchequer and improving statistics.

Recent tribunal cases

The continual disagreement between HMRC and taxpayers in relation to the application of the penalty regime is borne out by a review of some of the recent tax tribunal hearings in which, for example, no fewer than 17 out of the last 20 First-tier Tribunal (FTT) cases reported in the 2016/17 tax year were penalty cases.

One such recent case that demonstrates HMRC’s poor application of its regime is Dr R Pandey v HMRC. In this case, HMRC levied a penalty in view of the fact an incorrect amount tax had been deducted at source by the individual’s employer; a deduction over which the taxpayer had no control. In determining the figure on which the penalty was based, HMRC failed to take account of the fact that it is the employer’s duty to operate PAYE correctly and any tax not properly collected through PAYE is still taken into account in calculating the amount an individual is treated as having paid for penalty calculation purposes. In the FTT’s view, there was no relevant underpayment of tax and in addition the FTT confirmed that, if this decision is wrong, it would in any case have applied the special reduction available under Finance Act 2007 to reduce penalties where there are special circumstances and reduced the penalty to nil. As a result, the FTT cancelled the penalty levied for an error in a taxpayer document, commenting that this is the latest in a catalogue of cases where HMRC has incorrectly applied the penalty rules.

Take advice to ensure appropriate treatment

What this and many other cases demonstrate is HMRC most certainly does not always apply the penalty rules to the right cases and in the right way. All cases in which HMRC is seeking penalties should be scrutinised and in those cases where it is applicable, do not allow HMRC to rule out suspension of a penalty without proper consideration.

For more information please get in touch with Andrew Walker, or your usual RSM contact.

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