HMRC has invited responses to a consultation document ‘The simplification of regulatory penalties’ launched on 31 January 2011 looking at the range of penalties it can use for failure to comply with regulatory obligations across the tax and duty regimes. The document asks for views on how these can be simplified (but not removed).[1]
The purpose of this discussion document is to hear initial views on:
- whether there is benefit in looking at HMRC’s regulatory penalties with the aim of simplification and alignment;
- what you think of the possible options, and whether there are others we should be considering;
- whether there are areas that we should focus on because they are causing particular difficulty.
The closing date for responses is 11 March 2011 and responses should be sent to: powers.review-of-hmrc@hmrc.gsi.gov.uk; or
HMRC Review of Powers: compliance checks, Room 1/72, 100 Parliament Street, London SW1A 2BQ.
The People Bulletin spoke to three of its tax contributors and their observations are included in the rest of this article. Lorraine Owens of haysmacintyre makes the point that more needs to be done on understanding compliance and non compliant behaviour before you even start to design the right way of dealing with the problem.
Objectives of simplification
The methodology has drawn from findings of two reviews which were both concerned with looking at the frameworks surrounding regulatory penalties. The resultant ‘design principles’ are to:
- Influence behaviour.
- Be fair and proportionate.
- Be effective and set out in legislation.
Lorraine Owens’ views on the only two ‘possible options for change’ set out in the consultation document are:
“Option one – fixed penalties
Fixed penalties seems to me to be at odds with every single design principle. First, influencing behaviour; to use an analogy, if fixed penalties worked no one would ever get a parking ticket. The reasons for non compliance are too complex. In many cases I deal with, a clients’ failure to submit a return has resulted from an unwitting omission.
Second, a fixed penalty cannot be fair and proportionate to the offence in every case. As HMRC says in this document, where there is loss of tax, a tax geared penalty may be more appropriate, if the penalty imposed is less than the benefit of non compliance it’s not much of a stick. HMRC say that a fixed penalty may be more effective for failure to make a return or provide information but I disagree here too, for the size of penalty is relative to the size of the organisation suffering it. HMRC acknowledges the repeat offenders issue, suggesting perhaps that the ‘fixed’ penalties double or triple but also concede that this would add to the administrative burden, and if they double or triple the penalties aren’t fixed anymore.
Third, can a fixed penalty be effective? Yes, fixed penalties can be effective but only if they influence the behaviour of the taxpayer. No doubt it is more ‘cost’ effective to issue fixed penalties. I think though that fixed penalties are perceived as an unfair penalty as they cannot really link the degree of culpability to the pain. To use another motoring analogy I recall once being extremely put out to hear that an acquaintance had been fined £50 for speeding on the M3 the day after I had had my car towed away from an overdue parking meter on a back street in Hammersmith; my fine was four times that amount.”
Option two – A new single provision
This option involves a review of existing regulatory penalties with a view to repealing those which are ineffective and keeping those that work. Further work would involve the introduction of a standalone penalty provision that could be applied to any taxpayer obligation that was without its own penalty system.
HMRC says that careful consideration of each individual penalty would be required to properly understand the position and quote reasons why a penalty may not currently be used. First, it may be that the penalty is working so well that they never have to impose it. Second, it could be that the obligation attracting the penalty no longer exists, hence it is never imposed. Third, but not least, it could be that HMRC doesn’t impose it as the maximum amount would not have any impact on behaviour but would require disproportionate costs of collection.
I quite like the ‘if it ain’t broke don’t fix it’ approach. I also like the more sedate pace of Option 2.
In summary, it is, I think a good idea to review the penalty regime. The task is not an easy one though and I hope that HMRC exercises caution in the speed of change and recognise that it is equally important to give out the message that most taxpayers are compliant. I have been heartened of late in situations where my clients have experienced suspended penalties as this does seem to be a more productive solution. I wonder whether another motoring analogy may also be helpful to any new system imposed, that of a points-based one similar to points on a licence before the final blow.”
Impact on payroll departments
Diana Bruce of the Chartered Institute, Payroll Professionals (CIPP) gave a useful view from a payroll manager perspective:
“Of the penalties that HMRC have introduced over the last few years, those that impact the payroll profession the most are for late payment, late filing and inaccuracies in returns. As laid out in the discussion document (Annex A) current legislation for regulatory penalties has in excess of 250 penalties in over 30 pieces of legislation making it very difficult for employers and individuals to understand how and when the penalties apply across the various tax and duty regimes.
The CIPP welcomes the simplification and alignment proposals, in particular the consideration as to how proportionate certain penalties are in relation to the size of a business as this can affect SME's disproportionately. The document gives an example of a 'not exceeding' £3000 penalty which can be applied to both a large corporation and a small business, the impact of which would be considerably higher for the small business.
One of the options for consideration is to reduce the number of discretionary penalties in favour of fixed penalties to improve fairness through greater consistency and to provide tax payers with earlier certainty on what they may owe. The document also suggests examining whether there are penalties which are no longer necessary so could be repealed and those that have a good deterrent effect would remain in place. This forms part of the proposal to introduce a single standalone penalty provision which would have the benefit of making it simpler for taxpayers to understand the consequences of non-compliance.
The CIPP policy team will be responding formally to HMRC's discussion document 'The Simplification of Regulatory Penalties' through a survey of the CIPP membership.
Consistency and fairness?
David Daly, a partner at Crowe Clark Whitehill observed: “The fact that there are over 30 different pieces of legislation governing more than 300 penalties is sufficient reason in itself to review the current structure. Some penalties have clearly become redundant and this dilutes their impact as an effective deterrent. All taxpayers, whether individual or corporate, need to understand the consequences of non-compliance and more importantly HM Revenue and Customs need to apply such penalties consistently and fairly. A move towards a fixed penalty structure will perhaps achieve this but recognition of the size of the entity and the potential tax loss should also be a feature. Some thought should also be given to the size of any fixed penalty for it to be a real deterrent. Estimates suggest that more than one million taxpayers do not submit their tax returns on time. Whilst a welcome windfall to the Exchequer, it is difficult to argue that the current fixed penalty of £100 is a real deterrent when so many fail to comply. We welcome the review.”
[1] http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageExcise_ShowContent&propertyType=document&id=HMCE_PROD1_031025