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Head of the Cartoon HMRC tax man

Hector Tax-Inspector, Encouraging Taxpayers to meet their obligations since1995

According to an HMRC press release issued on 2nd February, around 4.3m customers sent in their Tax Returns in January, whilst approximately 2.5m missed the deadline resulting in a rather large bonus to the Treasury.

This amount has the potential to increase if the new system of penalties detailed in a recently issued consultation paper entitled ‘HMRC Penalties’ is implemented. This paper comes hot on the heels of the previous consultation paper ‘Direct Recovery of Debts’.

The reason for the consultation

The paper states that HMRC is considering different methods and level of penalties with the aim of encouraging taxpayers to comply with their obligations. The word ‘encouragement’ is used frequently throughout the paper but the real reason for the consultation can be found on page nine section 4.3 under ‘Automated Penalties’, namely that it costs a significant amount to collect relatively small amounts of penalties. HMRC believes that they could be adding more to the governments’ coffers by concentrating on defaulters who are more persistent or those who, when brought to account, have the potential to owe larger amounts of tax. HMRC is aware that it already issues a large number of low-value penalties and know that there will be more to come when smaller firms are hit by penalties under RTI as from October.

Main suggestion

The main suggestion is to replace the current financial-based system with one based on ‘penalty points’ similar to the loading used by insurance companies for motor claims. The first failure will result in a penalty letter but no penalty points being allocated, subsequent defaults will incur points, the exact number being dependant on the frequency of default and the amount of tax owed. HMRC believes that this system of points will provide an increased ‘credible threat’ to compliance.

Sir Alec Guiness as George Smiley

Sir Alec Guiness was the original voice Hector

Apparently HMRC do not intend to penalise people who are just a few days late, but we all know individuals who leave it to the last minute, and I suspect that giving them extra leeway will only mean that they will take advantage despite already having had nine months to submit their return.

One area that HMRC has not considered in the paper when comparing their proposed system with motor insurance companies, is that penalties are ‘wiped off’ after 10 years on your insurance. The question I ask is when will taxpayers’ penalties be wiped off, if at all.

Use of personalised customer accounts

It is also intended that personalised customer accounts will be in place by 2018. These accounts will enable the differing types of tax paid by any one individual to be viewed on one screen similar to the online screen page used by banks, which will clearly be of use to accountants and taxpayers alike

However, on reading further through the consultation paper it is clear that HMRC intends to use the account information in an attempt to achieve higher penalties. This intention is not highlighted, hidden in the text are the words ‘we may need to move away from applying penalties on a tax-by-tax basis and towards a penalty system based on the overall position of the customer.’ This can only mean points being allocated and penalties charged on the total amount of tax unpaid whichever type of return or payment is late.

Taxpayers’ ‘behaviour’
Mrs Doyl (Actress Pauline McLynn of Father Ted Picture in a gold Frame

HMRC officially stopped using Hector in 2001 replacing him with Mrs Doyle

The report states that HMRC will be looking at taxpayers’ behaviour following the creation of personal accounts; this phrase is not explained in the text and HMRC will need to elaborate. What is clear is that HMRC will be looking for a pattern of non-submission or late payment and allocate penalty points accordingly. Obviously this will have implications for the calculation of interest charges.

It must be hoped that they will not be automatic in their assumptions and appreciate that if a taxpayer is submitting or paying late for all or a couple of taxes that there may be something wrong with his business, cashflow wise and therefore need help in formulating a tax payment strategy.

Higher interest rates

The paper requests comment as to whether the use of higher interest rates would act as an ‘encouragement’ for due submission of returns. The current rate of 3% is already higher than the bank rate – whether a higher interest rate would persuade those defaulters to submit on time is questionable

What is certain is that HMRC could possibly encourage sooner and more often. As they apparently have such a sophisticated computer system they should be able to pick out those who are first time defaulters and make an effort to explain the system more effectively. HMRC’s Digital Strategy is for contact with customers via email. Should emails be targeted – e.g. issued on a monthly basis to all who have not submitted? Companies House already sends emails reminders for submission

Vulnerable individuals
Hector Tax Inspector In  a Celtic shirt

Hector Lives on, most recently Celtic fans have used his image to mock Rangers

As with nearly all HMRC consultation papers issued to date, nothing is mentioned about the effect this new system could have for taxpayers who do not have access to a computer or who have other ongoing problems, so email reminders are out of the window!

HMRC has not even done enough to explain their current methods to many of their customers who do want to pay so it is doubtful that they can be relied upon to convey such a complicated system with efficiency. Many taxpayers are still unaware that they cannot pay at the Post Office or that their HMRC local office is no more, so what chance have those with genuine problems, and the recent non-issue of payslips to enable taxpayers to pay at their bank or at the Post Office, without making any form of announcement, illustrates my point.

Tax Accountants’ views

HMRC is apparently interested in knowing accountants’ opinions as to whether every default should trigger a penalty. Many accountants, including myself, believe that it is grossly unfair to charge the £100 penalty to those whose tax bill turns out to be nil. Some taxpayers simply do not appreciate that just because they are PAYE they are still required to submit a return if asked by HMRC. Again, HMRC’s sophisticated computer system should be able to name these customers and not include them in the points system.

 

If any of you would like more detailed information on any aspect of HMRC Tax Rules, send me an e-mail and I’ll be pleased to advise further.

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