The simplification of regulatory penalties

Comments from ACCA to HM Revenue and Customs, March 2011.

ACCA would welcome the opportunity to address the issues of complexity and inconsistency in the regime of regulatory penalties operated by HMRC. Faced with the statistic that HMRC could potentially fine them for 317 things that are not 'paying the wrong tax', a typical taxpayer could be excused for wondering just what those things are, and why the number is so high. What is worse is that there are 46 different levels of penalty that could be applied, some tax geared, some fixed, some one off, some daily and some a mix of two or more of those methods.

To some extent, this complexity is a reflection of a tension in the regulatory penalty regime, created by HMRC's own principle of supporting 'those who seek to comply but [coming] down hard on those who seek an unfair advantage through non-compliance'. Fundamental to this principle is establishing the intentions of the taxpayer, but this requirement inevitably imposes on HMRC a far greater burden than operating a regime of 'strict liability' offences. This does not mean that the principle is wrong (far from it) but simply recognises that doing the right thing is not always the easy thing.

Looking at the types of infraction penalised, there are three broad categories of regulatory failure covered. Firstly, there is failure to comply with a specific reporting obligation, so HMRC is deprived of information which the taxpayer is under an explicit statutory obligation to supply. These may or may not have any impact on the tax due from the taxpayer (for example failure to submit a nil return). Secondly there are the failures to comply with a specific behavioural requirement, such as inappropriate use of non-dutiable fuel. These penalties relate to identifiable breaches of tax law which will have adversely affected the tax collected by the Exchequer. The third category of penalty relates to more general behavioural obligations, which may or may not directly impact the tax take, such as failure to keep records for income, corporation or value added tax.

In the case of penalties where there is a separate identifiable loss of tax arising from the specified behaviour, the continued existence of the penalty separate from the general 'failure to pay tax' penalties should be carefully considered. It may be that there is a genuine case for the separate retention of the penalty, but in many cases it may be more appropriate to bring the penalty within the general regime. If the rationale behind the current fixed penalty is the difficulty of assessing tax or duty lost (for example grogging) then the consequences should be different to cases where the duty is relatively small in individual cases, but the behaviour is considered so potentially harmful that the penalty has to serve as a deterrent (for example taxable use of duty free oil). There should also be a consistency across the taxes, so that evading £100 of tax, whatever the head of duty, gives rise to the same level of penalty.

With this in mind, ACCA should like to propose an alternative model for assessing the appropriate level of penalty in any given circumstance. HMRC have correctly identified that while tax geared penalties are not necessarily appropriate in regulatory situations, they have the advantage of proportionality as they will automatically be linked to the amount of money that the taxpayer should expect to be dealing with in respect of their tax affairs. Fixed penalties conversely have the benefit of certainty and ease of operation, but risk disproportionate impacts on differing populations of taxpayer, especially in connection with business taxes.

In order to reduce the incidence of disproportionate penalties while at the same time preserving some predictability for taxpayers as to the likely quantum of penalty in their particular circumstance, ACCA proposes penalties geared to the quantum of the subject matter of the tax for the individual taxpayer. So for example, where a penalty is imposed in connection with business taxes, the penalty could be based on the reported profits or turnover of the business. For transaction based taxes such as Stamp Duties and chargeable gains the baseline would be the value of the underlying asset/transaction.

The concept would be of particular value in 'failure to keep records' cases, as HMRC clearly have some identifiable activity to which the penalty relates. If the records are so poor that the level of underlying taxable activity cannot be established to a sufficient level of accuracy or certainty then there is likely to have also been a significant underpayment of tax. The case will merit full investigation and review, with the appropriate sanctions for the underpaid tax at conclusion of the review. However, where the taxpayer has kept some records or made some returns (for example submitted accounts to Companies House, or registered a transfer of property at the land registry) but not complied with their obligations under tax law, it seems appropriate that the penalty be set as a percentage of the value of the activity giving rise to the obligation. While the level of penalty might not be absolutely determinable in advance there would at least be sufficient predictability to the level of penalty for it to be both fair and proportionate, and influence behaviour consistency across the whole population of tax payers.