CIOT calls on HMRC to simplify behavioural tax penalties

On simplifying penalty suspension for careless errors

The Institute favours³ a regime that does not penalise the first careless error but puts the taxpayer on notice that future errors will attract penalties. To achieve this, it supports replacing the current suspension mechanism with HMRC’s proposal of a ‘caution’, rather than HMRC’s alternative suggestion of ‘automatic penalty suspension’, where the penalty would be reinstated for a subsequent mistake.

Ellen Milner, CIOT Director of Public Policy, said:

“A caution model is the simpler solution. It could also work well at shaping future behaviour, particularly if it has an educational focus, and it would avoid the need for a suspension regime, which over the years has proved challenging to administer.

“We are concerned that an automatic suspension model would have the unintended consequence of discouraging voluntary disclosures of subsequent errors because taxpayers might not want to admit them in the suspension period if it means that the original penalty is then payable on top of a penalty for the subsequent error.”

On penalties for deliberate behaviour

The Institute cautions against increasing penalty rates for deliberate behaviour and introducing penalty escalation for repeated deliberate behaviour, warning that increasing penalties risks disincentivising disclosures and encouraging lower levels of co-operation.

Ellen Milner continued:

“In our view, existing deliberate penalty levels are appropriate, and repeated errors are already built into penalty calculations. If HMRC decide to proceed with the measure, the levels should not be set at a level that could risk discouraging taxpayers from coming forward and cooperating with HMRC. This would be counter-productive as well as making the regime more complicated.”

On the reform of offshore penalties

The CIOT supports the simplification of offshore penalties. The world has moved on from when these categories were first introduced. It no longer makes sense to punish non-compliance connected to regulated overseas jurisdictions more harshly than purely UK non-compliance, now that there are sophisticated data sharing mechanisms in place with most overseas countries. The deterrent effect of higher offshore penalties is also highly questionable, and taxpayers often consider them to be very unfair, thus damaging trust in the tax system.

Ellen Milner warned:

“Offshore penalties are much too complex, and the rates can be unduly punitive and disproportionate. In our opinion, the rates should reflect the taxpayer behaviour that brought about the loss of tax, not where an offshore asset, such as a bank account, is located. A simpler offshore penalty regime would restrict increased penalties only where the behaviour is deliberate and where the offshore territory has not signed up to Automatic Exchange of Information Agreements, like the Common Reporting Standard (CRS).” 

On simplifying the framework for penalty reductions for the quality of disclosure

The Institute supports the removal of minimum 10% penalties for errors disclosed after three years and agrees that there is scope for simplifying penalty reductions for the type and quality of disclosures - but emphasises the necessity of having a clear definition for “unprompted” and “prompted” disclosures. This clarity is crucial for taxpayers and their advisers to identify and understand what qualifies as a prompted disclosure and what does not.  Arguably, there should also be a single reduction for co-operation, rather than, as now, trying to break it down into “telling”, “helping” and “giving access”.

Ellen Milner explained:

“The 10% minimum penalty is perceived as unfair as HMRC apply this rule even if a taxpayer comes forward immediately after they realise their mistake, if it occurred three or more years previously. Removing it should therefore provide an incentive for people to come forward to disclose past mistakes and also help to enhance trust in the tax system.  

“A disclosure should only be treated as prompted if HMRC initiates a compliance check or notifies the taxpayer in writing of a suspected inaccuracy. This will make the question of determining whether a disclosure is prompted or unprompted more objective and easier to determine both for HMRC and taxpayers.

“Merging some of the existing criteria for working out penalty reductions would also simplify the regime, as would shifting the focus onto simply whether a person has made a full disclosure and co-operated fully with HMRC.”

_{Notes for Editor}

_{1.Reform of behavioural penalties consultation}

_{2.CIOT’s submission}

_{3.In our response to last year’s Call for Evidence “Enquiry and assessment powers, penalties and safeguards”, CIOT said that they would favour a regime that does not penalise the first error but puts the taxpayer on notice that any future errors will incur a penalty.}