Delayed disclosures and HMRC’s penalty regime
Rebecca Busfield explains HMRC’s penalty regime and the mitigating circumstances that can affect the level of the penalty imposed
In 2017, HMRC inspectors began changing the way that they charged penalties for ‘failure to notify’ (FTN) and incorrect tax returns where the disclosure or amendment was over three years old. HMRC were starting to restrict the amount of the penalty mitigation given. The penalty reduction formula was changed. By not being able to secure the maximum penalty mitigation, the taxpayer therefore potentially faces inclusion in the Publishing Details of Deliberate Defaulters (PDDD) regime.
Since 2008, there have been statutory bands for the tax penalty percentages that are applied by HMRC, depending on the type of taxpayer behaviour which caused the tax issue – that is taking reasonable care; ‘careless’ conduct (negligence); ‘deliberate’ conduct (fraud); and ‘deliberate and concealed’ behaviour. The penalty percentage charged also varies according to whether the error was disclosed voluntarily to HMRC with no “prompting” by HMRC, or disclosed after an HMRC prompt. The percentages for FTN and for incorrect tax returns are contained in HMRC’s factsheets CC/FS11 and CC/FS7a respectively.
The penalties are reduced down to the set minimum levels based on the ‘quality’ of the disclosure, depending on how much assistance the taxpayer gives for telling, helping and giving access to records. Therefore, an adviser can make a big impact on the eventual penalty charged.
In December 2017, HMRC’s penalty factsheets were updated. They now say: “When we work out the quality of disclosure, we’ll also consider how long it’s taken you to tell us about the inaccuracy. If it’s taken you a long time (such as three years or more) to correct or disclose what is wrong, we’ll usually restrict the maximum reduction we give for the quality of disclosure to 10 percentage points above the minimum of the penalty range. This means you will not benefit from the lowest penalty percentage that’s normally available.”
So, for example, for a prompted, deliberate penalty, the minimum penalty charged for an incorrect return would normally be 35%; however, HMRC claim this would become 45% where there has been a significant delay to the disclosure. Ten per cent can create a big difference to a final settlement, where a large disclosure has been made.
The update messages for CC/FS7A say: “Factsheet updated to include new legislation which restricts the penalty for the timing of the disclosure. Note: this update note was incorrect, there was no new legislation” (December 2017) and “Text relating to the 10% penalty restriction has been updated following comment in cases heard at tribunal” (May 2019). It does not state on which cases these changes are based.
HMRC’s internal guidance on the restricted penalty reductions, ‘Timing of the Disclosure’, is found in the Compliance Handbook at CH82465. It says that this practice applies to any disclosures made after 5 September 2016. The restriction not only applies in cases where the person must have been aware of the inaccuracy and failed to act. It also applies in cases where they had failed to consider their position, and identify the inaccuracy sooner.
This guidance and policy has been distributed to all inspectors. HMRC are saying these changes have resulted due to their considerable publicity and advertising around tax compliance, especially following various campaigns and disclosure facilities. Therefore they feel that taxpayers who have not made changes after three years need additional punishment. However, this seems to be another example of HMRC taking worrying steps towards increasing their own autonomy. It appears lazy and unethical. Given there is nothing in the legislation about this point, and there was no consultation process, there is no clarity about when the three-year limit applies from.
Since 2010, HMRC have been able to publish the details of deliberate defaulters on their website for 12 months where the tax error is more than £25,000. For UK-based tax issues, where a taxpayer is able to get the maximum reduction down to the minimum penalty level, then their details will not be published on this list. However, under this new delayed disclosure policy taxpayers will not be able to reach the minimum penalty threshold. Therefore, HMRC will apply the PDDD. The danger is that this may prevent taxpayers from coming forward. There are also some cases which are borderline ‘deliberate’ – for instance where the taxpayer does not want the risk of a criminal investigation, so just accepts ‘deliberate’ behaviour to get the immunity from prosecution provided by the Contractual Disclosure Facility (CDF) / Code of Practice 9 (COP9) for a full and accurate disclosure.
There have been cases where HMRC have not applied the 10% restriction, or have been prepared to give a written commitment that it would not publish the details of the taxpayer on the basis that they were prepared to accept the additional 10% penalty uplift. However, HMRC note that all cases are confidential and depend on the circumstances of the case – there are no guarantees. It is possible that HMRC may change the PDDD policy following a review because it is apparently not seen as a major deterrent to tax evasion.
Rebecca Busfield is a Partner at Watt Busfield Tax Investigations LLP, based in London