The complexities of compliance: tax authority processes and making an appeal

02 December 2019
Volume 8 · Issue 10

Abstract

For obvious reasons, HM Revenue & Customs maintains a series of penalty-backed regimes to ensure compliance with tax law. However, with penalties being automatic, Adam Bernstein stresses the importance of taxpayers understanding the tax authority's processes and how appeals can be lodged

Adam Bernstein
With tax penalties being handed out like sweets by the HMRC, 1 million late filing penalties were issued for the 2015/16 tax year and it is crucial to understand the appeal process as, at times, certain circumstances can get in the way of compliance

Taxes can be considered an evil necessity. No one likes paying them. However, it is for this reason that HM Revenue & Customs (HMRC) has regimes in place that are backed by penalties for those who, for whatever reason, do not comply with their obligations. Whether the taxpayer is a person or a business, penalties can be imposed for a number of reasons—simply missing a deadline by a day or deliberately seeking to evade tax are classic causes.

UK tax law is complex and is growing. In 1997, tax law stood at 5000 pages, by 2009, it was 11520 pages but by 2016, it had grown to around 21 000 pages. With some 10 million words, it is 12.5 times longer than the Bible and 12 times the complete works of Shakespeare. In comparison, Hong Kong's tax law is 150 000 words and is spread over just 276 pages.

It is no wonder that penalties are handed out like sweets, especially as a penalty system for errors in tax returns and other documents was introduced in April 2009 and widened in April 2010. HMRC issued 1.04 million late filing penalties for returns due for the 2014/15 tax year. There were a further 1 million late filing penalties issued for tax returns due for the 2015/16 tax year. Even worse, it appears that in January 2019, a HMRC technical glitch led to some taxpayers receiving inaccurate payment reminders, which led to the wrong amounts of tax being paid and resulted in fines.

How HMRC works

With this in mind, it makes sense to understand how HMRC works, when penalties can be levied and what should be done if a penalty is received.

The first point to note is that the rules apply to numerous taxes including income tax, corporation tax, VAT, PAYE, national insurance contributions, capital gains tax and others. The rules also allow for different penalties according to the tax; for instance, VAT allows for a ‘wrongdoing penalty’ where, for example, someone issues an invoice that includes VAT that they are not entitled to charge.

The problem for most is that their excuses just do not carry any weight. HMRC regularly publishes the most ‘popular’ excuses it receives that, in January 2019, included:

  • A mother-in-law who was a witch that ‘put a curse on me’
  • I'm too short to reach the postbox’
  • ‘First maid left, my second maid stole from me and my third maid was very slow to learn’
  • ‘My boiler had broken, and my fingers were too cold to type’.
  • Use any of these excuses and a penalty will surely follow.

    HMRC believes that a taxpayer should be ‘a prudent person, exercising reasonable foresight and due diligence, having proper regard for their responsibilities under the Tax Acts’ (McLaughlin, 2015). It also expects every individual or business ‘to keep records that allow them to provide a complete and accurate return … [and] check with their agent, or HMRC, to confirm the correct position, if they are not sure’ (HMRC, 2014).

    Planning to fail

    Generally, tax compliance failures are quite easy to list and, as far as HMRC is concerned, include:

  • Late filing of tax returns
  • Failure to submit a tax return
  • Late payment of tax
  • Failure to notify HMRC of a tax liability (say a tax assessment is too low, a new source of income or that a business should be VAT-registered but is not)
  • Failure to provide information and documents.
  • Of course, the actual penalty will depend on how convincing an excuse is and whether the taxpayer can show that ‘reasonable care’ has been taken in complying with their obligations. This will be an uphill task for a penalty hit taxpayer.

    Errors relating to a tax return

    If errors arise with a tax return, HMRC will decide whether to impose a penalty but it tends to follow on automatically, precisely because the error was made. However, the penalty will be graded according to the degree of blame that lies with the taxpayer. HMRC uses three categories:

  • Careless: may involve a maximum penalty of 30% of the missing tax
  • Deliberate but not concealed: can mean a maximum penalty of 70%
  • Deliberate and concealed: can lead to a penalty of 100% of the missing tax, or more if the error is serious matter (for example, fraud or offshore tax matters).
  • » It is worth noting that, in certain circumstances, HMRC has the power to provide a ‘special reduction’ to a penalty where it can be removed entirely «

    Put simply: the more serious the reason, the higher the maximum penalty, but HMRC may reduce the penalty ‘if you … put things right.’

    Penalties can be suspended by HMRC, in total or in part, for up to 2 years. This does not happen often, is not offered and a taxpayer has to request it. Whatever is suspended should be agreed and documented.

    Where ‘deliberate’ errors have been found, penalties cannot be suspended. As to what happens next, this depends on whether the error was disclosed by the taxpayer to HMRC and whether the disclosure was ‘prompted’ (by, say, a visit) or ‘unprompted’ (the taxpayer's own accord). Naturally, ‘unprompted’ may lead to leniency.

    Most people recognise their obligations and do their best to comply. In circumstances when they have taken ‘reasonable care’ and have a ‘reasonable excuse’, HMRC often does not impose penalties. However, if a penalty is levied, it will be up to the taxpayer to prove that a ‘reasonable excuse’ for the failure existed.

    It is interesting to note that ‘reasonable care’ and ‘reasonable excuse’ are not defined by HMRC. This means the interpretation by a tax officer is subjective and will no doubt differ from that of the taxpayer.

    Of course, there will be times when circumstances beyond a taxpayer's control cause an event that leads to a penalty. Again, demonstrating a ‘reasonable excuse’ for the failure may lead to the penalty being waived in relation to late payment of tax, late filing of tax returns, a failure to notify liability or a failure to comply with a HMRC information notice.

    Reasonable or not?

    So, what is a ‘reasonable excuse’? Guidance from HMRC allows for a number of excuses, including a taxpayer's close relative or domestic partner passing away around the time they should have filed their return or paid tax; a serious illness where the taxpayer or a close relative falls seriously ill around the time the tax should have been paid; unforeseen events that can include delays due to industrial action or returns/payments being lost in the post.

    As to what might not, or will very rarely, be considered a reasonable excuse, HMRC says these include a deliberate failure to submit a tax return on time, as this act is controlled by the taxpayer; insufficient funds—but not if the shortage could not have been reasonably foreseen by the taxpayer, or the lack of funds is down to something outside of their control (the effective lockdown at TSB bank in April 2018 would probably count here); reliance on someone else, unless it can be shown that the taxpayer took ‘reasonable care’ to avoid the compliance failure (for example, hiring a professional accountant as opposed to a family friend).

    Furthermore, it is worth noting that, in certain circumstances, HMRC has the power to provide a ‘special reduction’ to a penalty where it can be removed entirely. These situations are, as would be expected, considered on a case-by-case basis, and HMRC offers no real definition of what constitutes ‘special circumstances’. Another option open to HMRC is to ‘stay’ a penalty; effectively, this delays enforcement of a penalty. However, in exchange, the taxpayer will probably have to agree some form of compromise with HMRC.

    The tax tribunal

    Just because HMRC has levied a penalty does not mean that a taxpayer must accept it. The system allows taxpayers a right to appeal a penalty to the tax tribunal, an independent body that will objectively consider the arguments of both sides.

    At this point, a taxpayer will have the opportunity to demonstrate that they took ‘reasonable care’ and can show a ‘reasonable excuse’ or ‘special circumstance’. Yet, considering that there are no real definitions of these terms, this will not be easy.

    The harsh reality

    Quite simply, any taxpayer handed a penalty levied by HMRC will face a steep uphill climb to prove that they had a ‘reasonable excuse’ when the failure occurred.

    It is absolutely key to remember that the word ‘reasonable’ can mean different things to different people. Those in doubt should consider taking good advice before fighting a losing case that will drag out the inevitable and cause stress at the same time.

    Panel: deliberate tax defaulters

    Once a quarter, HMRC publishes a list of those taxpayers who have been caught out deliberately defaulting on their tax paying obligations (HMRC, 2019). On the list, are various people, for example, one individual, between April 2010 and April 2014, defaulted on £263,099.17 and was fined £210,479.33.