Tax Penalties – A Nice Little Earner for HMRC


Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Document Based Penalties vs. a Tax Geared Penalty

With the passing of the 31 January deadline for the submission of self-assessment tax returns this seems a useful time to reflect on HMRC penalties. These come in a number of forms, where for instance a return is submitted late the penalties are largely automatic and take no direct account of the tax due (document based penalties) by comparison where an incorrect return is submitted the penalty is based on the additional tax due (a tax geared penalty).

HMRC’s Annual Accounts disclose that in 2019 it collected £1.1 billion in fines and penalties equating to 0.25% of the overall tax yield down from £1.7b (0.35%) in 2018 but still an eye watering figure.

The majority of document based penalties are issued automatically with no active human involvement other than the initial programming of HMRC’s computer. This means that the estimated 750,000 taxpayers who missed this years 31 January deadline can expect to have £100 penalty notices falling through the letter box over the next few weeks, with further penalties if the return is not submitted – rising to £10 a day after 12 months.

HMRC Penalty Time

Penalties are designed to encourage compliance with the rules and although they impose a financial sanction, they are not strictly a punishment. HMRC have the power to suspend (for up to 2 years) tax geared penalties where such a suspension would help the taxpayer to avoid future penalties for careless inaccuracy. The concept of suspension is to seek to influence behaviour and HMRC will only agree to suspension where they believe that behaviour can be influenced in a positive and measurable way.

HMRC state – penalty rules are designed to create a level playing field for the majority who make the effort to get things right, while penalising the minority who try to get round the rules, or who make careless mistakes. We apply the rules fairly and proportionately across the board.”

It is difficult to accept that this is the case where a penalty is imposed without “flesh and blood” human involvement and where HMRC have over a £1billion interest in the result. This has led to a number of first – tier tribunal cases which have effectively held that a real life human must have issued a relevant notice not a computer. As a reaction HMRC in October 2019 issued a technical note outline their intention to legislate and in so doing stated –

HMRC believes that its current practices are supported by legislation, but to provide certainty the government therefore plans to introduce legislation in the next Finance Bill to affirm that HMRC’s practice of using automated processes to help fulfil certain functions has a firm legal footing. This technical clarification will provide fairness across all taxpayer groups and provide certainty regarding the statutory basis for the existing policy and practice which have been in place for many years. …. The government intends that the legislation will apply both retrospectively and prospectively in order to safeguard revenue charged since automated processes were introduced by HMRC.

It is said that history is written by the victors, HMRC apparently do not share this view and are clearly (as has been seen before ) only too willing to re write history. They may seek to justify such action by describing it as clarification and safeguarding revenue but non the less as a matter of principle it remains objectionable more so when a penalty is imposed.

The fun fact is that HMRC have recently won an upper tribunal case which supports their view that it is not necessary for a flesh and blood humans to issue certain statutory notices and that a digital surrogate would suffice.

If you have been issued a penalty by HMRC contact us to see if we can help, you can also read more about HMRC below…

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