Enter Your E-mail

LITRG supports the recommendations of the Office of Tax Simplification (OTS) on tax penalties and their administration by HMRC, finding some particular potential pluses for the unrepresented.

Introduction

The OTS's November 2014 final report on tax penalties was only a short review of the tax penalty system. It focused on those penalties that have been ‘modernised’ since the formation of HM Revenue & Customs (HMRC) from the two former key tax authorities – the Inland Revenue and HM Customs and Excise.

OTS recommendations

The report recommends that a full review of the penalties regime is now required – covering both the more recently amended penalties and those that were not included in the review carried out at the time of the merger. The OTS suggests that part of this review should cover whether the current penalty regime is fit for the ‘digital age’, with the increased automation of HMRC systems.

Potential help for unrepresented taxpayers

The Low Incomes Tax Reform Group (LITRG) is pleased to see that the OTS also picks up a number of recommendations that could help unrepresented taxpayers. In the absence of a full review, HMRC should address these points urgently:

If you are not in self assessment, you should not be exposed to tax return penalties!

People cannot ignore their tax situation altogether if they are not required to complete a self assessment tax return – for instance, there is a duty to tell HMRC about untaxed income, and to register a new business, and failure to comply can result in penalties being charged. However, it seems obvious that people who have no tax liability should not be asked to complete tax returns each year, thus exposing them to penalties for late filing or for errors on the return.

LITRG is pleased to see the OTS therefore highlight this point, recommending that HMRC should remove people from the self assessment system where they are completing tax returns needlessly. Examples in the report include pensioners with an overseas source of pension income who are automatically sent a tax return each year, even if their overall income is within their personal allowance.

These unnecessary returns just make for additional costs in the system and a headache for those having to complete them. Taking them out of self assessment would also alleviate some burden on voluntary organisations that currently have to support low-income people with filing tax returns.

HMRC must be clear on penalties

The OTS report makes a number of recommendations that might be grouped under a theme of clarity being needed from HMRC.

The OTS says that HMRC must make their online system clearer so that people understand when they have finally submitted their tax return. The existing on-screen messages may lead some people – particularly those with limited digital capability – to conclude they have filed their return when in fact they have not.

Further, the report points out that when people who are having trouble with their return telephone HMRC, call centre staff should routinely warn them about penalties – something they do not do at present. The OTS also recommends that guidance to HMRC staff needs to be improved to ensure consistency in applying penalties, and when penalties might be suspended.

Special circumstances

HMRC are able to use their discretion with certain penalties to apply a ‘special reduction’. They might use this power if, for example, a taxpayer does not have a ‘reasonable excuse’ for a late return but there are other circumstances which mean a penalty might be inappropriate.

Even from the outset of the new regime, HMRC were reluctant to give much guidance to their staff on when this provision might be used, and felt it would be used extremely rarely. At the time, LITRG argued that it might be used for those people who, for example:

• are struggling with the system, not because of any particular ‘excuse’ such as a death in the family or illness, but just through a lack of understanding and capability;
• are willing to comply but have simply made a mistake;
• would have been protected under the old late filing penalty regime because the fixed £100 late filing penalty was reduced to nil if there was no tax to pay or a refund due (or reduced to the actual amount of tax, so a £40 penalty would arise if £40 tax was due);
• might have missed the 31 October paper filing deadline but would struggle to meet the 31 January online filing deadline because they are digitally excluded.

The OTS notes that the Tax Tribunal has taken a broader view than HMRC in terms of when special reduction might be used. It recommends that HMRC should review their guidance in light of those decisions and put more emphasis on special reduction in their penalties training material. LITRG could not agree more.

Conclusion

LITRG strongly urges HMRC to take forward the OTS recommendations, which all seem relatively straightforward to implement. Taking action on the above would make a great improvement in the system for the low-income unrepresented taxpayer, and save the costs of dealing with unnecessary tax returns and penalty appeals.

Useful link

The Office of Tax Simplification's final report on tax penalties (issued November 2014)