TaxApr 27 2018

Tax advisers confused by tough HMRC penalty stance

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Tax advisers confused by tough HMRC penalty stance

HM Revenue & Customs is being urged to clarify its position on issuing penalties for errors on tax returns, after concerns the taxman has embraced a new approach to investigation cases.

Accountancy group RSM claimed HMRC has changed its approach to investigations in such a way that individuals face a minimum 10 per cent penalty if an error is found in returns that are three-years-old or more.

A spokesman for HMRC denied there has been a recent change in stance, but said the direction of travel is to get tough on tax dodgers.

He said: "These changes came into effect in September 2016 and the Gov.UK website was updated to reflect this.

"The reason for the change is to get tougher on those who have been slow to come forward and who have failed to take advantage of previous disclosure and settlement opportunities."

FTAdviser understands that despite the crackdown, effectively the legislation does require HMRC to reduce the penalty to take account of the quality of the disclosure, defined in terms of quality as how quickly the taxman was made aware of a potential breach by the individual, the nature and extent of the tax avoidance.

HMRC is understood to take account of the quality of helping, telling and giving and take timing into account when looking at each of these.

But the legislation does not prescribe how timing is to be measured or taken into account when reducing a penalty.

Previously, HMRC did not take account of the time it had taken for a person to come forward to disclose non-compliance.

However, for any disclosure made after 5 September 2016 and in particular where a person has deliberately evaded tax, HMRC now takes into account how long it has taken a person to come forward to put things right.

This could be so even in cases of full co-operation with HMRC's enquiries following a disclosure.

The reason for the change is understood to be for HMRC to get tougher on those who have been slow to come forward and who have failed to take advantage of previous disclosure and settlement opportunities.

Mike Down, RSM partner, said taxpayers who had previously come forward voluntarily to correct simple "careless" mistakes, could, in future, face penalties or even public shaming.

He said: "If correct, it means that the position is potentially very serious for those whose irregularities are deemed 'deliberate'. The consequences go beyond the mere increase in the level of financial penalty.

"Where the cumulative tax understated since April 2010 is more than £25,000, the behaviour is deliberate and the maximum abatement is not available, then the taxpayer will be publicly 'named and shamed' by HMRC."

You catch more flies with honey than you do with vinegar.Jon Bean

Advisers, meanwhile, said while they understood the importance of encouraging accurate tax returns, they warned HMRC against being too heavy handed with individuals who were genuinely seeking to rectify honest mistakes.

Jon Bean, a chartered financial planner at Newton Aycliffe-based Eldon Financial Planning, said it is important that HMRC doesn't discourage people from assisting them when they have made a sincere mistake.

"The people who are going to try and circumvent the rules are not going to be the people that approach HMRC and say, 'do you know what? I've got this wrong.'

"Punishing people who hold their hands up to mistakes is not likely to be that productive and might even be counterproductive."

Mr Bean said he understood HMRC having to take a serious stance on tax evasion, but asked the government organisation to rethink its approach to penalties.

He said: "You catch more flies with honey than you do with vinegar."

Mel Kenny, a chartered financial planner at London-based Radcliffe & Newlands, said HMRC's new approach was "a nudge to get it right" and would ensure that people were not "reliant on being able to go back to so long ago."