Since the Inland Revenue and HM Customs & Excise merged in 2005 to create the single main tax-collecting body in the UK, HM Revenue & Customs (HMRC) has been consulting on ‘aligning’ and modernising the functions and powers of the two former departments. The consequences of filing tax returns and paying tax late are now under the spotlight, with both penalties and interest under review.
Although HMRC published separate consultations on each, it is our view that interest and penalties are closely-related issues. We highlight some key points below.
Except perhaps in the case of very late payment, the principle should be that late payment attracts an interest charge whereas late filing attracts a penalty. Some form of penalty ‘capping’ should be preserved to protect low-income taxpayers, possibly by reference to income rather than tax liability.
There is insufficient breadth to the consultations, as they fail to identify all the ways in which interest may come into play. For example, many people are forced to pay too much tax throughout the year then reclaim it by way of form R40. Claimants cannot reclaim via an online claim…yet there is normally no interest due on what will inevitably be a late repayment.
We think more focus needs to be given to the ways in which HMRC can help people to file and pay on time rather than simply aligning penalty and interest regimes across the various taxes. Often people fail in their tax responsibilities for reasons such as confusion and financial or personal difficulties rather than wilful delinquency. We suggest ways in which HMRC could support taxpayers, including:
• introducing more flexible payment options;
• allowing taxpayers extra time to file returns if they have a justifiable reason for the delay;
• suspension or cancellation of penalties (and even interest charges in certain circumstances) while the taxpayer is clearing a debt via a ‘time to pay’ arrangement or as a means of encouraging future compliance; and
• using HMRC’s data to identify where previously compliant taxpayers might have encountered a problem and offer them support at an early stage.
In terms of safeguards, these consultations also interlink with the concurrent Taxpayers Charter consultation in terms of the need for improvement in HMRC service standards. The review must address the issue that standard interest cannot always provide adequate redress where HMRC error causes the taxpayer to be out of pocket (for example where the taxpayer has to resort to expensive borrowing because of HMRC delay).
HMRC will no doubt take the view that some of the suggestions we have made are outside the scope of, or ancillary to, the Powers review. But we believe they are fundamental and that the powers team should make representations internally to ensure they are dealt with.
To read the full responses, use the links below.
Contact Name: Robin Williamson (Tel: 0844 579 6700 , Fax: 0844 579 6701)
To open the file click below:
File and Pay - LITRG response
Interest - a Harmonised Regime - LITRG response