Taxes are an evil necessity, and whether the taxpayer is a person or a business, penalties are imposed for a number of reasons – simply missing a deadline by a day, or for situations where taxpayers have deliberately sought to evade tax due, are classic causes.
While HMRC issues penalties for good reason, it also appears that in January 2019, a technical glitch at HMRC meant that some taxpayers received inaccurate payment reminders that led to the wrong amounts of tax being paid and a fine being levied as a result.
It’s worth pointing out that UK tax law is complex and is growing. In 1997, tax law stood at 5,000 pages, by 2009 it was 11,520 pages, but by 2016, it had grown to around 21,000 pages. With some 10 million words, it’s 12.5 times the number in the Bible and 12 times that in the complete works of Shakespeare. In comparison, Hong Kong’s tax law is 150,000 words over just 276 pages.
How HMRC works
It makes sense to understand how HMRC works, when penalties can be levied and what should be done if a penalty is received.
The first point to note is that the 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 someone issues an invoice that includes VAT that they are not entitled to charge, for instance.
The problem for most is that their excuses just don’t carry any water. HMRC regularly publishes the most popular excuses it receives which, in January 2019, included “my mother-in-law is a witch and put a curse on me”, “I’m too short to reach the post box”, “my 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”.
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 (such as a tax assessment that is too low, a new source of income or a business that 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 percent of the missing tax; “deliberate but not concealed” – which can mean a maximum penalty of 70 percent; or “deliberate and concealed” – which can lead to a penalty of 100 percent of the missing tax or more if the error is a serious matter, say fraud or offshore tax matters.
Penalties can be suspended by HMRC, in total or in part, for up to two years. This doesn’t happen often and isn’t offered; a taxpayer has to request it. Where deliberate errors have been found, penalties cannot be suspended. What happens next 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” may 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 of these, 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; 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 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.
It is also worth noting 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 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; this 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
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.
The harsh reality
Quite simply, any taxpayer who is handed a penalty levied by HMRC will face a steep uphill climb to prove that they had a reasonable excuse when the failure occurred. However, even if HMRC finds against the taxpayer, they have the right to challenge the decision at a tribunal.