HMRC has issued a 'discussion document' which looks at the future of compliance penalties in the modern environment of online filing. Although this is the first stage of a long process (new legislation would be implemented at stage four) it does give businesses the opportunity to comment on the objectives and possible options for any new penalties regime.
The document sets out five principles for a new penalties regime as follows:
- The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance. Penalties are not to be applied with the objective of raising revenues.
- Penalties should be proportionate to the offence and may take into account past behaviour.
- Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.
- Penalties must provide a credible threat. If there is a penalty, HMRC must have the operational capability and capacity to raise it accurately, and if it does raise it, it must be able to collect it in a cost-efficient manner.
- Customers should see a consistent and standardised approach. Variations will be those necessary to take into account customer behaviours and particular taxes.
Based on these, HMRC recognises that the current penalty regime will need to change. For example, it recognises that automatic penalties for missing a deadline by just a day or two may not be a proportionate approach. It also asks whether penalties that focus more on individual behaviour would be helpful, for example, using a system of penalty points (similar to the one used for motoring offences) as part of the penalty regime.
There are some hints in its text that HMRC may be backing down from its hitherto harsh approach to VAT default surcharges, for example it asks whether penalties for a short failure to comply (eg one or two days) should be replaced by an interest based penalty. HMRC famously lost a case brought by Enersys in 2010 where a tribunal cancelled a six figure surcharge for a VAT payment made one day late on the ground that it was a disproportionate penalty. It has since had to deal with many other appeals submitted on the same basis.
Many will also recall that HMRC has already announced a replacement for the default surcharge regime, and even included the impending legislation in FA 2009. This proposed a penalties system similar to that in place for direct taxes, but has since been on hold, apparently due to IT and funding related reasons. There is no mention of this new system in the consultation, which simply refers to the current surcharge regime, but it should be noted that some of HMRC's latest ideas outlined in the discussion document differ from the 2009 proposals and could change parts of the new regime in waiting.
Nevertheless, this consultation provides a golden opportunity for businesses to air their views (and hopefully bring about the demise of VAT default surcharges). BDO will be submitting a response to the consultation based on its own experience of assisting clients with penalty appeals and if there are any specific points you would like us to consider in our response please contact karmjit.mader@bdo.co.uk .
The discussion document is available at: HMRC penalties - a discussion document.
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