On 17 September 2015 HMRC issued a summary of responses to a discussion document on penalties. The original discussion document published on 2 February 2015 put forward five principles that should be the basis for any tax penalty regime. These are the following:

• The penalties should be designed to encourage taxpayer compliance rather than to raise revenue;
• The penalties may take into account past behavior by the taxpayer and should be proportional to the offence committed;
• Penalties must be applied fairly and ensure that compliant taxpayers are in a more favorable position than those who are non-compliant;
• The penalties must be credible, backed up by appropriate operational capacity to raise and collect the amount charged;
• HMRC should be seen to have a consistent and standardized approach to penalties.

HMRC received responses to the document from 93 parties and held meetings with ten stakeholders. The respondents were all broadly in agreement with the five principles put forward by HMRC.

Respondents pointed out that there was some tension between the need for fairness to individual taxpayers and the need for a standardized approach. Some commentators preferred a greater use of interest rather than penalties. Around a third of the respondents suggested that HMRC should review its approach to the criteria for reasonable excuse and special reduction as the criteria to qualify for these are often too stringent for taxpayers to demonstrate.

Some commentators expressed the opinion that the VAT default surcharge currently generates large penalties for relatively small offences and does not distinguish between payments that are one day late and those that are late by several months. The respondents generally supported the idea that penalties should reflect the overall compliance position of a taxpayer rather than applying on a tax by tax basis. There was also agreement that penalties for first time offences should generally be suspended subject to certain conditions and with the support of guidance from HMRC, with the objective of encouraging future compliance.

Other suggestions for changing the current system included issuing a warning letter instead of a penalty to first time offenders; setting earlier deadlines for non-compliance taxpayers; staggering the due dates for returns and payments so the return falls due before the payment; and refunding penalties if compliance improves within a specified period of time.

HMRC views on penalties

HMRC considers that in future fewer penalties will be charged and the penalties charged will be targeted at careless or intentionally non-compliant taxpayers, taking into account the taxpayer’s compliance history. By combining this with automation and simplification of the process HMRC will release resources to tackle serious non-compliance.

Late filing

A new model will be developed for late filing penalties. Currently there are large volumes of low value penalties and a high proportion of successful appeals against the penalties. HMRC will consider not charging a late filing penalty where no tax is due; or where the period of late filing is very short or is the first default. HMRC will also look at increasing the opportunities for mitigation and use notifications to remind the taxpayer before the deadline is reached.

Late payment

HMRC will consider options for replacing or enhancing penalties for late payment with a penalty interest system that would ensure the response to non-compliance is proportional to the period by which the payment is late.

Inaccurate returns

The penalties dealing with inaccuracies in the tax return will be made more straightforward but changes will be considered over a longer time period in view of the complexity of establishing reasons for inaccuracies and quantifying taxpayer cooperation. The penalties will continue to be linked to the size of the inaccuracy but HMRC is also to consider setting penalty percentages to reflect the taxpayer’s compliance history, considering de minimis limits and increasing penalties in relation to a combination of factors such as degree of inaccuracy, compliance history and level of taxpayer cooperation.

Other considerations

In addition to monetary penalties HMRC will consider non-financial sanctions and what it refers to as behavioral nudges. Deadlines could be made shorter for non-compliant taxpayers. The role of guidance for taxpayers is recognized and as digital tax accounts are developed relevant guidance will be provided online.

A further consultation document on penalties for late filing and late payment is to be issued later in 2015. This will be followed by a document on penalties for inaccurate returns. If these consultations result in a new penalty regime the earliest date for the legislation would be the issue of the Finance Bill 2017.