HMRC has just published details of responses to a discussion document on the future of tax penalties and likely next steps. We thought it would be interesting to have a look at this and try to gaze into the crystal ball, given the spirited debate we sometimes enjoy with HMRC over the imposition of and size of penalties.

Who were the Respondents and What Did They Think?

There were 92 respondents who provided written responses to the discussion document (44 individuals, 15 representative bodies and 33 businesses), and the 10 stakeholders who attended face to face consultation meetings. Most respondents felt that all penalties should be behaviour-based; it could be difficult to differentiate whether, for example, a lack of engagement was intentional or an indicator of vulnerability. Different respondents made various suggestions about factors that should be taken into account in determining the level of a penalty. These included the customer’s age, “mental capacity” and motivation; the complexity of the issue and the business; the clarity of the relevant HMRC guidance; and the amount of tax involved.

There seemed to be quite a lot of debate around the label of compliant and non-compliant. Some respondents considered that HMRC take a far too simplistic view of compliance, regarding an entity as either compliant or non-compliant. There was a view that there should be lenience where the failure is minor.

Respondents believed that HMRC relies on penalties to raise revenue and waits for customers to make a mistake so it can charge a penalty (how surprising!), rather than sending reminders to avoid the situation reaching that stage and it was said to be difficult to speak to HMRC or reverse decisions.Respondents also felt that HMRC needed to understand why customers may accumulate penalties, and help them get things right. The consensus was that the HMRC needed a greater use of warnings and suspension before charging penalties and that customers needed to be better educated.The view was that HMRC needed to be able to distinguish between innocent errors, careless oversights and deliberate evasion; and reflect the speed with which the non-compliance was put right. Occasional errors should receive warnings only.

It was thought that penalties should take account of past, present and future behaviour, and it was suggested that a first offence could be acknowledged without imposing a penalty; or a smaller penalty for lateness could be charged initially, increasing in size over time to reflect the period of delay. Further thoughts were that: –

  • There should be recognition that there will always be some cases where a reasonable excuse exists
  • There should always be a right of appeal against penalties
  • Penalties should be simple so they are easy and rational to operate
  • Customers should be given more education about the current regime
  • Penalties should not be too severe, create hardship, or be used as a threat
  • Where possible, decisions to charge penalties should be based on definitive facts such as time available to settle, amount lost, nature of the offence, and how it arose or was disguised
  • Penalties should not be so punitive that they harm future cooperation between a customer and HMRC by creating resentment for perceived unfair treatment.

Recommendations from Respondents 

Almost all respondents described an ideal penalty system as one which is simple, flexible, proportionate, appropriate, and tailored; systems in which penalties are only issued when they are deserved.

Further suggestions for improving communications were to dedicate a page on penalties on the website; involvement of agents and professional bodies when writing HMRC guidance to ensure key messages that promote awareness of penalties are included; issue both paper and digital reminders closer to deadlines; improve channels for the public to contact HMRC, especially face to face and by phone; awarding penalty points before any penalty is charged, with the opportunity to discharge those points (points do not make prizes here!); using a digital tax account could be used to flag to the user when the points reach a level that puts the customer at risk of being charged penalties.

A common theme was that those who only miss a deadline by a few days are probably usually part of the compliant majority, so not penalising them would enable HMRC to focus resources on the non-compliant. In addition, respondents suggested if fewer penalties were charged, there may be fewer appeals and reviews, further freeing up HMRC resource.

HMRC Actions – Next Steps

HMRC published “Making tax easier: The end of the tax return” on 18 March 2015. This explained how customers will be able to view and manage their tax information in an online digital account. It outlines how HMRC will use the information it already holds to populate the digital accounts so that customers can deal with their tax affairs quickly and easily. HMRC’s view is that this represents a major step in moving to a new, modern, tax system which will make it far easier for all customers, whether they are individuals or businesses, to manage their tax affairs and pay the right tax at the right time (notwithstanding concerns about access to the internet for some of the taxpaying population).

In the longer term HMRC’s aim is to streamline how tax works, automatically targeting help and support to customers when they need it, based on the data in their tax account. While this may mean customers will find it much easier to meet their obligations it is likely there will always be some customers who, either accidentally, carelessly or determinedly, will not abide by the rules. For that reason HMRC believes that an effective penalty regime will continue to be an element in HMRC’s compliance strategy.

HMRC however did recognise the need to distinguish between the vast majority of customers who are generally compliant and those who are not.

HMRC shared the view of respondents that the penalty system needs to work effectively to encourage those who make one off errors back into full compliance, and counter the activities of careless or intentionally non-compliant customers.

That, together with automating and simplifying the penalty process as much as possible, should release resource within HMRC to focus its attention on tackling serious non-compliance, for example late filing and payment.

In developing a new model for late filing penalties HMRC will explore options for; not charging a penalty where the period of lateness is very short; not charging a penalty for the first default; taking account of the customer’s compliance history across all of the taxes they are involved with; increasing opportunities for and use of mitigation in recognition of the circumstances surrounding the default and HMRC’s desire to encourage future good compliance; and using notifications to remind the customer that their return is due (before the due date is reached) and draw their attention to the default and its consequences for penalty purposes (after the due date has passed).

HMRC appears keen to take the issue of penalties forward whilst taking affected bodies views on board, and subject to Ministers agreement, HMRC proposes to issue firstly a further consultation document on proposals for a new penalty scheme for late filing and late payment and then a document on inaccuracy penalties. If Ministers ultimately decide to proceed to legislation the draft legislation would be consulted on; the earliest possible date for legislation would be Finance Bill 2017.  

HMRC will also publish the roadmap for “Making tax easier: The end of the tax return” later this year.

Full details of the responses can be found on the Government website here

 Our View

We agree that a fair and proportionate penalty system targeting the non-compliant, whilst supporting the compliant majority is a desirable target.

We disagree with the use of penalties solely as a revenue-raising measure, which does sometimes still appear to be the case.

We do applaud HMRC’s desire to simplify penalties and to take into account customer behaviour, and we look forward to following this fascinating subject as it develops.

If you have been affected by tax penalties, and feel that you have not had a fair hearing with HMRC, or are just confused by the current system, please do contact us at or on 07949 929663 for a no obligation consultation.