Adam Bernstein explains the ins and outs of HMRC penalties – and how to respond to them
axes are a necessity. No one likes paying them. But it’s for this reason that HMRC has penalties in place for those who, for whatever reason, do not comply with their obligations. And to some, penalties are handed out like sweets. HMRC issued 1.04 million late filing penalties for returns due for the 2014/15 tax year. There were another 1 million late filing penalties issued for tax returns due for the 2015/16 tax year. Even worse, it appears that in January (2019), an HMRC technical glitch led to some taxpayers receiving inaccurate payment reminders that led to the wrong amounts of tax being paid and a fine as a result.
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How HMRC works
HMRC’s rules apply to numerous taxes including Income Tax, Corporation Tax, VAT, PAYE, National Insurance Contributions, Capital Gains Tax and others. The rules also allow for different penalties according to the tax. VAT, for example, allows for a ‘wrongdoing penalty’ where, for example, someone issues an invoice that includes VAT that they are not entitled to charge.
The problem for most is that their excuses just don’t carry any water. HMRC regularly publishes the most ‘popular’ excuses it receives that, in January 2019, included a mother-in-law who was a witch that ‘put a curse on me,’ ‘I’m too short to reach the post box,’ ‘first maid left, my second maid stole from me, and my third maid was very slow to learn,’ and ‘my boiler had broken and my fingers were too cold to type.’
None work because HMRC expects that a taxpayer should be “a prudent person, exercising reasonable foresight and due diligence, having proper regard for their responsibilities under the Tax Acts.” It also expects every individual or business “to keep records that allow them to provide a complete and accurate return… and check with their agent, or HMRC, to confirm the correct position, if they are not sure.”
Planning to fail
Tax compliance failures are generally quite easy to list and as far as HMRC is concerned, include late filing of tax returns, failure to submit a tax return, late payment of tax, failure to notify HMRC of a tax liability (say a tax assessment is too low, a new source of income, or that a business should be VAT registered but isn’t), and a failure to provide information and documents.
Of course, the actual penalty will depend on how convincing an excuse is and whether the taxpayer can show that ‘reasonable care’ had been taken in complying with their obligations. This will be an uphill task for a penalty-hit taxpayer.
Errors relating to a tax return
If errors arise with a tax return HMRC will decide whether to impose a penalty, but they tend to follow on automatically precisely because the error was made. However, the penalty will be graded according to the degree of blame that lies with the taxpayer. HMRC uses three categories:
• ‘Careless,’ which may involve a maximum penalty of 30% of the missing tax;
• ‘Deliberate but not concealed,’ which can mean a maximum penalty of 70%; or
• ‘Deliberate and concealed,’ which can lead to a penalty of 100% of the missing tax, or more if the error is a serious matter (say fraud or offshore tax matters).
The more serious the reason, the higher the maximum penalty, but HMRC may reduce the penalty “if you… put things right.”
Penalties can be suspended by HMRC, in total or in part, for up to two years. This doesn’t happen often, isn’t offered and a taxpayer has to request it.
Where ‘deliberate’ errors have been found penalties cannot be suspended. As for what happens next, it depends on whether the error was disclosed by the taxpayer to HMRC and whether the disclosure was ‘prompted’ (by, say, a visit) or ‘unprompted’ (the taxpayer’s own accord). Naturally, ‘unprompted’ can lead to leniency.
Most people recognise their obligations and do their best to comply. In circumstances when they have taken ‘reasonable care’ and have a ‘reasonable excuse’ HMRC often don’t impose penalties. But if a penalty is levied it’ll be up to the taxpayer to prove that a ‘reasonable excuse’ for the failure existed.
It’s interesting to note that ‘reasonable care’ and ‘reasonable excuse’ are not defined by HMRC. This means the interpretation by a tax officer will be very subjective and no doubt will differ from that of the taxpayer.
Of course, there will be times when circumstances beyond a taxpayer’s control cause an event that leads to a penalty. Again, demonstrating a ‘reasonable excuse’ for the failure may lead to the penalty being waived in relation to late payment of tax, late filing of tax returns, a failure to notify liability, or a failure to comply with an HMRC information notice.
Reasonable or not?
So, what is a ‘reasonable excuse’? Guidance from HMRC allows for a number including:
• A taxpayer’s close relative or domestic partner passing away around the time they should have filed their return or paid tax;
• A serious illness where the taxpayer or a close relative falls seriously ill around the time the tax should have been paid; or
• Unforeseen events which can include delays due to industrial action or returns or payments being lost in the post.
As to what might not, or will very rarely, be considered a reasonable excuse, HMRC says these include:
• A deliberate failure to submit a tax return on time as this act is controlled by the taxpayer;
• Insufficient funds – but not if the shortage could not have been reasonably foreseen by the taxpayer, or the lack of funds is down to something outside of their control (the effective lockdown at TSB bank in April 2018 would probably count here); or
• Reliance on someone else unless it can be shown that the taxpayer took ‘reasonable care’ to avoid the compliance failure – hiring a professional accountant as opposed to a family friend for example.
Also worth noting is that HMRC has the power, in certain circumstances, to provide a ‘special reduction’ to a penalty where it can be removed entirely. These situations are, as would be expected, considered on a case-by-case basis, and HMRC offers no real definition of what constitutes ‘special circumstances.’ Another option open to HMRC is to ‘stay’ a penalty, which effectively delays enforcement of a penalty. But in exchange, the taxpayer will probably have to agree some form of compromise with HMRC.
The tax tribunal
But just because HMRC has levied a penalty doesn’t mean that a taxpayer must accept it. The system allows taxpayers a right to appeal a penalty to the Tax Tribunal, an independent body which will consider the arguments of both sides – objectively.
It’s at this point that a taxpayer will have the opportunity to show that they took ‘reasonable care’ and can show a ‘reasonable excuse’ or ‘special circumstances’. But considering that there are no real definitions of these terms, this won’t be easy.
Deliberate tax defaulters
Once a quarter HMRC publishes a list of those taxpayers who have been caught out deliberately defaulting on their tax paying obligations. On the current list, published mid-December (2018), is UK Coachways Limited, formerly of Bolton, which between January 2012 and September 2015 defaulted on £380,191 and was fined £159,860.22. Similarly, Hereford Coach & Commercial Refinishers Ltd, defaulted between September 2010 and November 2014 on £46,565 and was fined £22,001.91. Lastly, William Waldron, trading as Milton Coach and Mini-Bus Hire, formerly of Kilbirnie, defaulted between January 2013 and December 2015 on £25,614 and was fined £21,771.90.
The harsh reality
Quite simply, any taxpayer handed a penalty levied by HMRC will face a steep uphill climb to prove that they had a ‘reasonable excuse’ when the failure occurred, or that special circumstances existed and so an exemption, or ‘special reduction’, should have been given.
Those without a ‘reasonable excuse’ will leave HMRC with no other option but to examine the circumstances of the case to determine whether the penalty justifiable and correct. But even if HMRC finds against the taxpayer, they have the right to challenge the decision at a tribunal.
It’s absolutely key to remember that the word ‘reasonable’ can mean different things to different people. Those in doubt should consider taking good advice before fighting a losing case that will both drag out the inevitable and cause stress at the same time.
Appeals are time-limited – don’t delay, and speak to a good accountant.
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