The penalty for late self-assessment filing needs rethinking. HMRC's recent discussion document looks promising, writes Paul Aplin.
The OTS report on tax penalties published on 13 November 2014 was joined on 2 February 2015 by an HMRC discussion document.
While they cover a number of different issues, both consider one penalty provision that is in desperate need of rethinking: that for self-assessment late filing.
A fundamental principle of the new penalty regime introduced by Finance Acts 2007, 2008 and 2009 is that it should influence behaviour to improve compliance. Penalties should operate fairly, be seen to do so and be proportionate to the degree of non-compliance.
Initially, the late filing penalty was capped at the amount of tax outstanding at 31 January. Now, however, it can easily accumulate to completely disproportionate amounts. The 'per partner' penalty for partnership returns also seems to me to be disproportionate. In practice I have seen these penalties create as much resentment as compliance. They create a feeling that HMRC wants to catch people out. This is not the effect that was sought (neatly characterised by one senior HMRC official as 'we want the returns, not the penalties') and I question whether it has really delivered for HMRC either in terms of yield or taxpayer attitudes.
A statistic that really struck me in the OTS report was that 16% of ITSA returns show nil liability. A further 8% show a liability of less than £50. That means that around 1.5 million returns are being processed to collect not one penny of tax and a further three quarters of a million returns disclose relatively trivial amounts There must surely be potential for a considerable reduction both of the compliance burden placed on taxpayers and of HMRC’s costs – particularly those created by avoidable calls to contact centres and the pursuit of so many individual penalties.
The OTS recommends removing some individuals from self-assessment, improving guidance and training, providing more warnings to taxpayers and issuing a reminder at the beginning of January each year. It also notes that penalties for late filing and late payment in other countries (including Canada, New Zealand and Hong Kong) are based on the tax owing rather than on a fixed amount. The old capped penalty therefore appears to have compared better internationally.
Encouragingly, HMRC’s discussion paper acknowledges the problems with the current system, which makes no distinction between someone who misses a return deadline by a day or two and someone who has made no attempt to comply at all. The department’s current thinking looks promising. It is based on five core principles:
HMRC raises the possibility of using non-financial sanctions and of potentially operating a progressive system similar to penalty points for motoring offences, so that initial financial penalties are avoided, but more substantial penalties then apply for more serious failures or for persistent non-compliance. This demonstrates a significant change in HMRC’s thinking and approach.
It seems to me there is a clear win in sight here if HMRC is willing to be bold: reduced compliance costs for taxpayers, reduced processing costs and some reputational credit for HMRC, and all at no net loss of yield.
That must be a goal worth pursuing.
The penalty for late self-assessment filing needs rethinking. HMRC's recent discussion document looks promising, writes Paul Aplin.
The OTS report on tax penalties published on 13 November 2014 was joined on 2 February 2015 by an HMRC discussion document.
While they cover a number of different issues, both consider one penalty provision that is in desperate need of rethinking: that for self-assessment late filing.
A fundamental principle of the new penalty regime introduced by Finance Acts 2007, 2008 and 2009 is that it should influence behaviour to improve compliance. Penalties should operate fairly, be seen to do so and be proportionate to the degree of non-compliance.
Initially, the late filing penalty was capped at the amount of tax outstanding at 31 January. Now, however, it can easily accumulate to completely disproportionate amounts. The 'per partner' penalty for partnership returns also seems to me to be disproportionate. In practice I have seen these penalties create as much resentment as compliance. They create a feeling that HMRC wants to catch people out. This is not the effect that was sought (neatly characterised by one senior HMRC official as 'we want the returns, not the penalties') and I question whether it has really delivered for HMRC either in terms of yield or taxpayer attitudes.
A statistic that really struck me in the OTS report was that 16% of ITSA returns show nil liability. A further 8% show a liability of less than £50. That means that around 1.5 million returns are being processed to collect not one penny of tax and a further three quarters of a million returns disclose relatively trivial amounts There must surely be potential for a considerable reduction both of the compliance burden placed on taxpayers and of HMRC’s costs – particularly those created by avoidable calls to contact centres and the pursuit of so many individual penalties.
The OTS recommends removing some individuals from self-assessment, improving guidance and training, providing more warnings to taxpayers and issuing a reminder at the beginning of January each year. It also notes that penalties for late filing and late payment in other countries (including Canada, New Zealand and Hong Kong) are based on the tax owing rather than on a fixed amount. The old capped penalty therefore appears to have compared better internationally.
Encouragingly, HMRC’s discussion paper acknowledges the problems with the current system, which makes no distinction between someone who misses a return deadline by a day or two and someone who has made no attempt to comply at all. The department’s current thinking looks promising. It is based on five core principles:
HMRC raises the possibility of using non-financial sanctions and of potentially operating a progressive system similar to penalty points for motoring offences, so that initial financial penalties are avoided, but more substantial penalties then apply for more serious failures or for persistent non-compliance. This demonstrates a significant change in HMRC’s thinking and approach.
It seems to me there is a clear win in sight here if HMRC is willing to be bold: reduced compliance costs for taxpayers, reduced processing costs and some reputational credit for HMRC, and all at no net loss of yield.
That must be a goal worth pursuing.
