It’s difficult to believe that the current penalty regime for inaccurate tax returns has now been with us for more than eight years – a regime introduced by HMRC with the very best of intentions of changing errant taxpayer behaviour to ensure that future tax returns are filed accurately.
To recap, penalties are charged according to the type of taxpayer behaviour that leads to an inaccuracy and on whether the tax adjustment is volunteered freely or arises as a result of an HMRC challenge.
There are four categories of behaviour. Of least concern is ‘mistake’ despite taking reasonable care, next is the failure to take reasonable care (or ‘careless’), moving up to ‘deliberate’ and finally to the most serious – an inaccuracy which is ‘deliberate with concealment’. Put simply, the more serious the behaviour, the higher the penalty.
HMRC’s recent response to a freedom of information request by RSM highlighted a six-fold increase in ‘deliberate’ penalties over a four year period. It also highlighted that over half of all penalties deemed ‘careless’ end up being suspended. We have noticed such trends in practice.
But aside from the very obvious method of using monetary penalties as a way to produce additional funds for the Treasury’s coffers, why does HMRC seem so keen to increasingly claim that a taxpayer’s behaviour is ‘deliberate’? There are at least three possible reasons:
First, the law provides that only penalties arising out of errors deemed to be ‘careless’ are capable of being suspended. Tax tribunals have of late been quick to criticise HMRC for failing to readily apply the suspension rules and that is no doubt the reason why the number of penalties being ‘yellow carded’ is rising rapidly and will most likely continue to grow. It follows that if HMRC decides to impose more penalties for ‘deliberate’ behaviour, then the question of suspension does not arise - the error does not fall within the ‘careless’ category.
Second, in HMRC compliance checks where:
(a) the tax underpaid as a result of a ‘deliberate’ inaccuracy exceeds £25,000,and
(b) the taxpayer fails to fully engage and co-operate in progressing the investigation,
HMRC is obliged to publish the name of the ‘deliberate defaulter’ on its website. Such naming and shaming can have a sobering and potentially life-changing impact on the person and is thus a powerful deterrent in HMRC’s armoury.
Third, by establishing ‘deliberate’ rather than ‘careless’ behaviour, HMRC can potentially open up 20 years for assessment instead of just six. Accordingly, in cases where there are repeated inaccuracies over several years, a claim by HMRC of ‘deliberate’ behaviour will have a material impact on the level of extra tax due, not just on the penalty amount.
It is right that those who deliberately understate their tax liabilities are subject to the full force of HMRC’s penalty regime. But we have real concerns that some HMRC officers might – in an attempt to raise revenue – be seeking to wrongly and unfairly deem behaviour to be ‘deliberate’ in cases where the taxpayer has made a genuine mistake.
For more information please get in touch with Mike Down, or your usual RSM contact.