Reform of behavioural penalties – LITRG response

This consultation builds on a previous HMRC call for evidence on the topic of penalty reform and the work of HMRC’s Tax Administration Framework Review. It explores options to simplify HMRC behavioural penalties for inaccuracies and failures to notify. It also looks at ways of ensuring they provide a stronger deterrent for those who deliberately avoid their tax obligations. HMRC’s key objectives include a simpler penalties system, which is easier for taxpayers to understand and cheaper for HMRC to administer, and minimal detrimental impact on perceived fairness, which could risk undermining trust in HMRC and the tax system. LITRG’s comments focus on the position of unrepresented taxpayers who are unable to pay for professional advice.

There have also been consultations recently on new ways of tackling non-compliance and the better use of improved third-party data. We suggest that careful consideration should be given to the extent to which taxpayers can rely on HMRC guidance and tools as well as how these areas will interact with the reform of behavioural penalties.

The consultation looks at the minimum 10% penalties that HMRC apply to inaccuracies disclosed after three years and failures to notify disclosed after 12 months for non-deliberate behaviour. We think that these should be removed in both cases. The former does not have a basis in statute, which we do not think is appropriate as a matter of principle. Conceptually, we think it is odd that the timing of disclosure would affect the level of these penalties; in addition, it can lead to situations that can damage trust in HMRC.

We think the suggestions regarding the simplification of penalty reductions for unprompted disclosure, and in particular the quality of disclosure, are reasonable. We also agree that penalties for offshore non-compliance could and should be simplified. We think there is merit in moving from a penalty suspension system to a ‘caution’ system.

The consultation also explores an alternative model for penalties, that would not be behaviour-based. We are not in favour of this approach, as a behaviour-based regime provides an important safeguard for unrepresented taxpayers. The consultation also looks into greater non-financial sanctions for the most serious non-compliance. Although we do not expect these to be in point for unrepresented taxpayers who cannot afford to pay for tax advice, we note that as a matter of principle there should be a clear link between the non-financial sanction and the non-compliance.