Penalties and the digital age
The closing date for comments on HMRC’s consultation on penalties has arrived and HMRC will now be considering the responses.
The aim of the consultation document
The aim of the consultation, in HMRC’s words is as follows:
‘How we change the way that penalties are applied as we transform HMRC to deliver more digital services, based around our customers, so they can get things right first time……Our digital plans will transform the way we operate and serve our customers. One example of how we plan to do this involves a personalised tax account for customers, so we can help make it simpler, quicker and easier for them to pay the right tax at the right time…….It’s important that we design tax policy for a modern, digital world and make the most of the opportunities this technology provides.’
HMRC’s views on the penalty regime
According to HMRC, their penalty strategy is based on three key elements, ‘promote,’ ‘prevent,’ and ‘respond.’
‘ ◦Promote is about ensuring customers have the information they need to get their tax and entitlements right first time; that they clearly understand their obligations and risks they face through non-compliance; designing out careless errors; looking for risk; and giving active help to customers to meet their obligations.
◦Prevent is about exploiting our digital channels and using what we know about customers to identify risks as they arise and intervening to give customers the opportunity to correct their mistakes (in registration or filing) when they transact with HMRC, and before we make payments or repayments.
◦Respond is about tailoring our enforcement and compliance activities and interventions to address specific customer behaviours and compliance risks. We will use technology where we can to automate tasks and to support the successful investigation of non-compliant behaviours. Our activities will be more personalised as a result of our increased ability to analyse customer information.
◦…….This three-pronged approach is underpinned by our ability to analyse the increasing amount of digital information and data that is available to us……Penalties have a role to play in supporting the promote and respond aspects of our approach to compliance.’
Changing the penalties regime
HMRC state that:
‘In future, we want to make greater use of behavioural and customer understanding, and use our digital capability to communicate with our customers in a more targeted and individualised way. Our digital delivery will increasingly be based around the whole customer and not based around specific tax regimes. And so we want to consider if our penalties could also be applied in a more sophisticated and customer-focused way.’
HMRC are clear that the penalty regime is designed to encourage compliance and is not applied with the objective of raising revenues. HMRC state that they are open to using ‘non-financial sanctions’ as an alternative to financial penalties.
‘One option could be a progressive system similar to penalty points for motoring offences, so that initial financial penalties are avoided, but more substantial penalties then apply for more serious failures or for persistent non-compliance with obligations.’
Comment
The current system of penalties is complex and has led to the suspicion amongst taxpayers and their advisers of being geared towards the collection of tax revenues rather than being compliance orientated. To this extent, the clarification in the document that penalties are not perceived by the government as a tax gathering mechanism are welcome. Fresh ideas are always welcome, although it is difficult to see what ‘non financial sanctions’ may be. It is to be hoped that this will not involved an extension of the existing ‘naming and shaming’ regime for taxpayers who have received penalties where the penalties total more than £25,000.
Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells.