In Alice in Wonderland, the Red Queen said “sentence first, verdict afterwards”. A similar approach is now being taken in tax law. New penalties legislation has been included in the 2007 Draft Finance Bill which makes a penalty payable if HMRC think
that a taxpayer has done, or not done, something. This is a significant shift from the taxpayer actually doing or omitting to do something.
John Cullinane, President of The Chartered Institute of Taxation (CIOT) says: “Where penalties are concerned, the test should always be objective rather than subjective. We believe that in the proposed legislation the words ‘HMRC think that’ are superfluous. The words come from legislation where the inspector is exercising judgement. In the case of penalties, that is not the position. Either there has been an offence giving rise to a penalty or there has not. The penalty follows from what the taxpayer did and from nothing else. These words are not needed.”
When this was first suggested by HMRC, the CIOT objected, as did other bodies. On Budget day HMRC admitted that there was almost universal disquiet about the statutory formula ‘If HMRC think’ …..”
John Cullinane adds: “Despite objections to this subjective clause, it remains in the draft legislation. The CIOT recognises that HMRC have engaged in constructive consultation over many issues. We are doubly disappointed that in this instance they do not appear to be listening.”
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Notes to Editors
Examples of draft legislation in Finance Bill 2007, Schedule 24
Error in taxpayer’s document
1 (1) A penalty is payable by a person (P) where—
(a) P gives HMRC a document of a kind listed in the Table below, and
(b) HMRC think that Conditions 1 and 2 are satisfied.
(2) Condition 1 is that the document contains an inaccuracy which amounts to, or leads to—
(a) an understatement of P’s liability to tax,
(b) a false or inflated statement of a loss by P, or
(c) a false or inflated claim to repayment of tax.
(3) Condition 2 is that the inaccuracy was careless or deliberate
Error in HMRC assessment
2 (1) A penalty is payable by a person (P) where—
(a) an assessment issued to P by HMRC understates P’s liability to tax,
(b) HMRC think that P has failed to take reasonable steps to notify them, within the period of 30 days beginning with the date of the
assessment, that it is an under-assessment.
(2) In deciding what steps (if any) were reasonable HMRC must consider—
(a) whether P knew, or should have known, about the underassessment, and
(b) what steps would have been reasonable to take to notify HMRC.
3 (2) (2) An inaccuracy in a document given by P to HMRC, which was neither
careless nor deliberate when the document was given, is to be treated as
careless if HMRC think that P—
(a) discovered the inaccuracy at some later time, and
(b) did not take reasonable steps to inform HMRC.
13(5) a supplementary assessment may be made in respect of a penalty if HMRC think that an earlier assessment operated by reference to an underestimate of potential lost revenue.
19 (1) Where a penalty under paragraph 1 is payable by a company for a deliberate inaccuracy which HMRC think was attributable to an officer of the
(a) the officer as well as the company shall be liable to pay the penalty,
(b) HMRC may pursue the officer for such portion of the penalty (which
may be 100%) as they may specify by written notice to the officer.