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Busy Practitioner by Mark McLaughlin CTA (Fellow) ATT TEP

Mark McLaughlin CTA (Fellow) ATT TEP, General Editor of TaxationWeb, highlights some significant potential changes affecting such matters as penalties in HMRC enquiries.The headlines in recent months from a tax perspective have been dominated by important and at times controversial issues, such as the Carter Report recommendations on tax return filing deadlines, and proposed changes to the inheritance tax regime for interest in possession and accumulation and maintenance trusts. However, shortly after Budget 2006, HM Revenue & Customs (HMRC) issued a consultation document ‘Modernising Powers, Deterrents and Safeguards: The developing programme of work’. This document affirms HMRC’s strategy to tackle non-compliance and to ‘come down hard’ on offenders. Whilst in fairness it must be stressed that the document also affirms HMRC’s commitment to simplifying, providing certainty and generally improving its service to ‘customers’, there seems to be a strong emphasis on tackling deliberate non-compliance. This may ultimately affect such matters as how penalties are charged in tax return enquiries.

The document distinguishes between different categories of non-compliant taxpayers. For example, in the case of taxpayers who try to comply but make mistakes in their tax affairs and have taken reasonable care to get it right, HMRC aim to correct the error and to ‘educate’ to avoid any repetition. However, if taxpayers have apparently failed to take reasonable care, HMRC’s intention is to inspect, enquire and penalise. For taxpayers who deliberately fail to comply, HMRC’s approach is to investigate, and to prosecute in appropriate cases.

HMRC are also looking at ‘a range of interventions’ to tackle non-compliance, such as business record keeping reviews during an accounting period, and assisting ‘self audits’ by taxpayers.

Higher penalties?

A new approach to penalties is put forward:

• HMRC indicate that there would be no penalty for taxpayer ‘mistakes’ (e.g. a misunderstanding or human error) where reasonable care has been taken to comply.

• The review is also considering how penalties can be applied to encourage taxpayers who have failed to take reasonable care to make a voluntary disclosure to HMRC where their tax liability has been incorrectly stated. It is suggested that the penalty should be ‘substantially reduced’ in those circumstances.

• The taxpayer’s compliance history may become a factor when determining the level of penalties. This could result in a penalty reduction if there has been a good compliance record over an earlier period (or possibly a suspension of penalties if compliance is maintained over a future period), but higher penalties for persistent non-compliance.

HMRC consider that taxpayers should face a penalty if tax is understated due to a failure to take reasonable care when completing a tax return. Examples put forward of taxpayers not taking ‘reasonable care’ include not seeking properly qualified advice on matters outside the taxpayer’s personal competence where it would be reasonable in view of the amounts involved, and not following up significant reductions in projected tax liability compared with previous years to ascertain the reason.

Penalties would also be considered if the taxpayer takes an ‘unreasonable tax position’ which is not disclosed (i.e. broadly an error of judgement resulting from a lack of reasonable care), such as taking an incorrect view of the law which either conflicts with an existing precedent or published advice, or which cannot be argued with a reasonable prospect of success. The possibility of sub-categories of offence (e.g. ‘gross negligence’ and ‘reckless behaviour’) is also being considered.

As mentioned, there is also a strong indication that higher penalties will be introduced to deter non-compliance. HMRC states that it has reviewed the present practice of penalty abatement and mitigation from the maximum 100 per cent penalty, and warns that ‘examinations of closed cases suggest that the penalties actually charged after reductions under these existing rules might be too low to discourage or deter non-compliance.’

The suggestion is made that taxpayers with a record of persistent non-compliance should face a higher penalty than would normally be due. HMRC also consider that a higher penalty may be appropriate if the taxpayer deliberately obstructs an investigation. In addition, HMRC wish to tackle the present inability to charge a penalty where a taxpayer has overstated a tax loss, by charging an ‘appropriate penalty’ at the point when the loss would have been used. HMRC is also reviewing the penalty regimes for submitting late returns.

HMRC investigation powers

HMRC considers that ‘effective and proportionate powers’ are needed to combat tax crime. The suggestion is put forward that HMRC should adopt relevant parts of the Police and Criminal Evidence Act when conducting criminal investigations (different procedures in Scotland). They also state that ‘access is needed occasionally and under appropriate safeguards to more intrusive surveillance techniques’ to combat organised crime.

The period of consultation ended on 23 June 2006. It seems that the review and consultation will result in a strengthening of HMRC’s investigation powers, with the likelihood of higher penalties in many enquiry cases. The consultation document can be downloaded from the HMRC website:
http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcise_InfoGuides&propertyType=document&id=HMCE_PROD1_025429

Mark McLaughlin CTA (Fellow) ATT TEP is a consultant to professional firms, and Editor of TaxationWeb (www.taxationweb.co.uk). He can be contacted by e-mail at tax@markmclaughlin.co.uk.