HMRC approach to tax penalties for businesses is “garbled and illogical”, says expert

The UK’s HM Revenue & Customs (HMRC) is increasingly unwilling to believe that any error in a tax return can be the result of an ‘innocent error’, said Fiona Fernie, a tax investigations expert at Pinsent Masons, the law firm behind Out-law.com.

New powers introduced in recent years to allow HMRC easier access to information from both taxpayers and third parties, together with increased powers to search premises and tighter penalty regulations, all mean that businesses are under more scrutiny than ever from HMRC, she said.

Fernie said that the chances of a business being inspected by HMRC have risen considerably. When the current government came to power in 2010 it allocated £900 million to target tax evasion and fraud. “With a general election looming once again, evasion, avoidance and indeed any kind of tax planning which is seen to be aggressive, is very much in the firing line” she said.

She explained that since all businesses are now required to file returns online, HMRC is able to use its CONNECT software to analyse returns, compare them to sector averages, and make connections between tax records and information from other sources to identify areas where tax collection is at risk.

“Whilst it should be possible to expect that, if enough care is taken, a business cannot possibly ‘fall foul’ of HMRC, in recent years the political and media pressure on HMRC to collect ever increasing amounts of tax appears to have resulted in the blurring of the definitions of tax mitigation, tax avoidance and tax evasion,” Fernie said.

The rate of penalty chargeable for inaccuracies in a tax return is based on the behaviour of the taxpayer and whether the error came to light from an ‘unprompted’ or ‘prompted’ disclosure. Where a taxpayer has taken reasonable care, but despite this has made a mistake, then no penalty will be due. However, a penalty of up to 30% of the tax at stake will be payable if the taxpayer’s actions are classed as ‘careless’ – which means a failure to take reasonable care. Higher penalties are charged for taxpayers whose inaccuracies are classed as deliberate. The penalty rate ranges from 20% to 70% where the behaviour is deliberate, but not concealed, and from 30% to 100% where the behaviour is classed as deliberate and concealed.

Fiona Fernie said that in her experience, “HMRC is increasingly unwilling to believe that any error can be the result of an ‘innocent error’, even where businesses have filed their returns after considerable thought, or indeed where they have decided that no return is necessary, again after careful consideration”.

“It appears that HMRC will still seek to make discovery assessments, and impose a penalty, even in cases where the directors of a business have chosen their course of action having researched their obligations and complied to the best of their ability and judgement,” she said. “Indeed, even the largest companies, which do not undertake ‘aggressive’ planning, may find HMRC seeking penalties after settlement of a complicated technical dispute”.

Fernie said that HMRC’s approach was illustrated in a recent consultation document in relation to a specific penalty for schemes in respect of which the general anti–abuse rule (GAAR) is deemed to apply. That document, in explaining why HMRC is seeking to introduce such a penalty, states “….there is an arguable case that a taxpayer becoming involved in an abusive scheme demonstrates ‘deliberate’ behaviour in making their return on this basis”. The document continues “However, each case is judged on its own merits and, in practice, it may sometimes be difficult to levy a penalty where the avoider obtained professional advice, even where this advice is found to have been incorrect.”

She said “To my mind this demonstrates how completely garbled and illogical the thinking on tax offences has become; there is clearly a need to tackle abusive tax arrangements, but to suggest that taxpayers, whether businesses or individuals, should seek professional tax advice but then not be allowed to rely on it without risking a penalty for ‘deliberate’ behaviour if the advice is later found to be wrong seems to fly in the face of the ‘fairness’ that the Government has professed itself to be keen to promote.”