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After a lot of pressures from accountants and various organisations, such as the Citizens Advice Bureau, HMRC have finally produced its response to the consultation on the future direction of tax penalties. Published on 17th September 2015, the paper garnered hundreds of responses with widely differing views and HMRC has drawn the following conclusions so far:

  • There needs to be a distinction between those who have committed a one-off or minor compliance failure versus those who are habitually non-compliant. This requires penalties to be targeted and proportionate to the individual or business’ compliance history.
  • The new penalty model must be consistent across all taxes.
  • HMRC needs to first focus on late filing and payment penalties as these produce large volumes but are low in value and crucially for HMRC generate a lot of appeal traffic and customer contact that is expensive for them to resource.

HMRC state that they plan to consider all of the following in the new penalty regime model:

  1. Stop issuing penalties for late filing if no tax is due as highlighted on the return
  2. Introduce a short period of grace after the filing deadline
  3. Introduce an unpenalised first default (as is already the case for RTI filing and payment penalties)
  4. Consider the taxpayer or business’ compliance history
  5. Have the ability to use mitigation to recognise why the default occurred
  6. Introduce warnings ahead of the issue of a penalty (again already part of the RTI model)
  7. Replace the current late payment default schedule with a penalty interest regime

HMRC also say that it will be difficult to design a penalty regime that is simple, whilst taking into account compliance history, especially where the failure is one of inaccuracy rather than a deliberate action.

Financial Penalties

As well as financial penalties, HMRC will continue to investigate if non-financial sanctions could be just as effective in changing compliance behaviours. This could include reducing the deadline for filing for those who have been non-compliant so there is an incentive to develop good compliance behaviour.

Personally I was underwhelmed by the next steps outlined in the document. Of the hundreds of responses (92 of which were from mainstream organisations such as the CAB and main accountancy bodies) and with several months to consider them, I would have expected more concrete proposals, rather than just a reiteration of key principles. We are told to expect a further two consultations: one for late filing and payment and one for inaccuracies, with legislation not planned until Finance Bill 2017.

Having a fair, proportionate and targeted penalty regime is vital to both employers, their accountants and ordinary taxpayers, but equally it can only be driven by accurate data capture. The frequent rebasing of the RTI penalty regime over the last three years appears to have been driven by the inability of HMRC to rely on its core systems. HMRC needs to address this issue if PAYE penalties can return to the automated approach that must be at the core of penalty system design given the department’s constraint on staffing resources and also for them to rely on digital tax accounts reducing customer contact.

Disputed PAYE Charges

In the same way that the response document refers to low value but high volume penalties leading to unnecessary customer contact that they cannot resource, this is also the case with the current state of play with PAYE. Disputed PAYE charges are still difficult to raise and take far too long to resolve as they are resource intensive for HMRC. I know this from the experience of my own firm, as our Payroll Bureau manager Lucy, spends literally hours on the ‘phone dealing with queries.

I can but hope, that the reason that HMRC’s response document is vague in terms of concrete proposals is because HMRC is addressing the real ‘next step’ in penalty design: stable internal systems that are fit for purpose, though given HMRC and other Government Department’s record on software systems, I am not overconfident.

Oh and by the way, what has happened to the usually vast number of RTI (PAYE) penalties for the quarter ended 5th July? We at Morgan Jones & Co haven’t seen any and from postings on my Accountants Forum, neither has anyone else! Can this mean that employers and accountants are now operating PAYE perfectly or have HMRC finally seen the light?

 

Image of David Jones Shrewsbury Accountant and Founder of Morgan JonesIf any of you would like more detailed information on any aspect of UK Tax Returns, send me an e-mail and I’ll be pleased to advise further.

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