When the Inland Revenue and Customs & Excise (VAT) merged to form HMRC in 2005, there existed an eclectic mix of penalty provisions relating to the various taxes previously administered by the separate Departments. In 2007 they started a programme to unify the system of penalties across the tax regime.
The four key areas of the new system are penalties for:
- Inaccuracy in a document
- Failure to notify HMRC of a liability
- Failure to make a return on time
- Failure to pay on time
Inaccuracy in a document
The provisions on inaccuracy in a document are based on tax-geared penalties, with the severity of the penalty based on an escalating scale of culpability, which includes:
- Deliberate attempt at concealment; in other words, blatant fraud.
- Deliberate understatement of tax liabilities, without concealment
- Gross Carelessness
- Failure to take reasonable care
- No culpability i.e. a genuine mistake
If the taxpayer was not culpable to any degree in respect of the inaccuracy in the document and the Inspector accepts that he or she has simply made an error, then they have a complete defence and no penalty can be levied. The burden of proving culpability lies with HMRC.
Failure to notify HMRC of a liability
The failure to notify provisions use the same sliding scale of culpability except that failure to take reasonable care is replaced with lack of a reasonable excuse; if you do have a reasonable excuse this is also a complete defence.
By contrast, there is no reference to deliberate behaviour in the provisions on failure to make a return and failure to pay on time, but the taxpayer can still rely on the defence of reasonable excuse; however the taxpayer needs to prove it.
Failure to make a return on time & Failure to pay on time
These are statutory penalties, similar to driving your car without displaying a road tax disc. In practice however, if you have a reasonable excuse, such as illness or events that are outside of your control, HMRC have the discretion to waive them.
In practice the provisions on reasonable care and reasonable excuse are used much more often than those on deliberate behaviour, presumably because deliberate behaviour is harder to prove. According to a recent Freedom of Information request, there were 13 penalties for deliberate behaviour and 3,208 for failure to take reasonable care in relation to self-assessment returns in 2010-2011. The following year the figures rose to 49 and 9,315 respectively. Figures for reasonable excuse are not available, but the published tax tribunal decisions show that such penalties are increasingly common.
The concept of reasonableness lies at the heart of the new penalty system, but amazingly, the penalty legislation does not contain a proper definition of what is reasonable. I have been that where a taxpayer has discovered a careless error, or where a reasonable excuse has finished, such as serious illness, the taxpayer will still have a defence if he or she remedies the error within a reasonable time thereafter.
So, if you’ve been fined and believe you have a genuine excuse, in the absence of a clear definition of what is “reasonable”, you should contact an Accountant who will advise you. Your Accountants advice will be largely based on precedents, but also partly on your track record with HMRC. If you haven’t been in trouble before, even if a defence of reasonable excuse is rejected, there’s a good chance that a good Accountant will be able to get the penalty reduced. Find out more about Tax Avoidance practices