Urgent reform needed to ensure the punishment fits the crime

04 July 2017

This week I am going to do something a little different. I am going to give you a few facts and then ask you a couple of questions.

Mrs W was self-employed until February 2012 when her business ceased. We don’t know what that business was but it must have been very small because she had no liability for tax in 2011/12. She did not complete a tax return for that year, because it appears she thought that she was not required to do so after her business had ceased. The first that she knew of any problems was when she received a £100 penalty in February 2013 – over a year after she had ceased trading. That prompted her into submitting a return, which she did on 2 May 2013. HMRC informed her on June 2013 that she had no tax liability for 2011/12.

My first question is what penalties was she charged for her late return submission? The second is what do you think would have been an equitable penalty? (hint: the answers are not the same!).

The penalty which was charged, and which was confirmed by the tax tribunal, was £1,300!

The reason it was so high was because when she did file her return she did it on paper rather than online. This meant her penalties were recalculated with reference to the paper filing deadline of 31 October rather than the online filing date of 31 January. As a result, she was charged late daily penalties of £10 per day which start to accrue when a return is more than three months late. Had she filed online her penalty would have been calculated with reference to the 31 January deadline and would have been considerably lower.

What was your answer to my second question? I suspect that most readers would think that that the equitable answer was nil. After all, this lady had no tax liability and she had told HMRC that she had ceased her business. Perhaps some might think that a flat £100 penalty was appropriate for the initial failure, but I can’t believe that any reader thinks that £1,300 could ever be fair.

What has gone wrong? The filing dates and penalties are set out by law and they were properly applied in this case. Mrs W’s belief that she did not have to file a return after she had ceased her business cannot really be treated as a reasonable excuse (if it were it would open the floodgates to similar claims). There are provisions under which penalties can be reduced or withdrawn because of ‘special circumstances’. Unlike the judge in the partnership case we mentioned last week the judge here decided that there were no special circumstances: that is perhaps surprising.

I’m not blaming anybody for this decision. The taxpayer got it wrong and the penalties were lawfully imposed. But it does leave a terrible taste in the mouth. I cannot believe that anybody – parliamentarian, judge, HMRC official or ordinary taxpayer - can believe that the imposition of such enormous penalties in a case like this can possibly be justified.

Reform is urgently needed.

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