As time passes and technology develops the issue of fines for failure to meet tax compliance obligations has become more automated and Making Tax Digital (MTD) will presumably only increase this. A recent tribunal decision has however raised an interesting question about the legality of HMRC’s automated penalty mechanism.
When a tax return is submitted more than six, and then twelve months after the filing date, a late filing penalty (LFP) of £300 or 5 per cent of the tax liability that would have been shown in he return, whichever is higher, is chargeable. If the return has not been submitted when the penalty is raised the law states ‘HMRC is to determine the amount….to the best of HMRC’s information and belief’ - in other words a HMRC officer has to make a considered assessment of the likely level of tax in order to go on to quantify the LFP.
What appears to happen in practical terms is that the HMRC computer simply raises a £300 LFP for any taxpayer whose return is six months late, and again at twelve months. This sounds acceptable and the LFP can, if needed, be recalculated once a return is submitted.
However in the recent case, the HMRC computer had simply churned out a fixed £300 penalty without anybody considering whether or not there were grounds for a higher penalty based on 5 per cent of the estimated an amount of tax. The tribunal judge said that the phrase, ‘HMRC is to determine the amount’ required a decision by ‘a flesh and blood human’ as to the level of LFP the department believed to be payable. As the judge put it, ‘not even the most sophisticated computers can (yet) form beliefs, and certainly not those operated by HMRC’ (a bit harsh on HMRC’s IT offering, but many would say fair). Simply put, the tribunal considered that the lack of human intervention meant that the LFP had not been raised in a valid way. Ironically by not considering whether a higher penalty might be due, HMRC appear to have invalidated the lower penalty that was in fact issued.
Interestingly the judge’s comments were made even though the LFPs had already been invalidated. The tribunal determined that the taxpayer had a genuine reasonable excuse - he was in prison and thus HMRC could not prove receipt by him of the notice to file a tax return.
HMRC needs to rely on considerable computer support in order to make the tax system work efficiently and effectively. However if the law indicates that human involvement is required, then computers cannot be left to impose that law. What will happen in future when we have MTD? Will artificial intelligence need to come into play? Or more likely, will very careful drafting of legislation be needed to ensure the smooth operation of MTD without human intervention?
For more information please get in touch with Mike Down, or your usual RSM contact.