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Robin Williamson outlines the response by LITRG to HMRC's proposed changes to the interest and penalty regimes for the late filng of tax returns and the late payment of tax.

Key Points

In any new regime of interest and penalties, the key principle is that late payment may lead to an interest charge and late filing may result in a penalty, but in general there should be no overlap.

That is the main thrust of LITRG’s response to HMRC’s latest proposals for changes to the penalty and interest regimes for late filing of returns and late payment of tax.

Background

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. R40 claims cannot be made online… yet there is normally no interest due on what will inevitably be a late repayment.  

Recommendations

We think more focus needs to be given to the ways in which HMRC can help people to file and pay on time in preference simply to 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 Review team should make representations internally.

Links:

File and Pay - LITRG response:  http://www.litrg.org.uk/uploadedfiles/document/1_589_FileAndPayLITRGfinal120908.pdf

Interest - a Harmonised Regime - LITRG response: http://www.litrg.org.uk/uploadedfiles/document/1_589_HMRC_Interest(HarmonisedRegime)_LITRGresponse_Final.pdf