Will automatic penalties be a thing of the past?

I understand that just under 900,000 people missed the most recent income tax filing deadline of 31 January 2015. HMRC have announced that it is too costly to investigate reasons for missing Self-Assessment deadlines and that the £100 fine should therefore be cancelled if a reasonable excuse is given for cases under appeal.  HMRC have indicated that this move is to allow them to focus more of their resources on tax avoidance and evasion rather than penalising large numbers of “ordinary people who are trying to do the right thing”.

HMRC then go on to point out that this is “part of our planned, proportionate approach to penalty appeals, particularly for small businesses and individuals”.  Going forward HMRC intend to amend their systems so that they will be able to track patterns of behaviour and focus on those who persistently fail to pay or send their tax returns on time.

According to The Daily Telegraph, those people who fail to file their tax returns on time will escape a fine providing they have a reasonable excuse for being late which shows mitigating circumstances.  There is suggestion that a reasonable excuse is one which is outside the control of the taxpayer and which stops them meeting a tax obligation.  It is reasonable to assume that these excuses would include death of a loved one, an unexpected medical condition or a fire.

This announcement is welcome. A recent article in the tax professional press re-enforces the frustrations that tax practitioners face when dealing with the Revenue administrative machinery.  In the case the article covered HMRC were seeking to penalise a community amateur sports club with a penalty of £1,278 and were not willing to back down. At the last minute they finally acknowledged that the club’s advice had been correct and the penalty was invalid.  This was 3 days before a case management hearing.

I have also had the experience of HMRC’s bureaucracy machine being unwilling to back down.  My client’s affairs were always up-to-date and he did not owe any tax.  Due to a computer failing HMRC’s computer repaid almost £4k to my client which was not due to him.  He immediately, and voluntarily, repaid it.  This led to the Revenue issuing penalties and interest on the taxpayer.  Initially HMRC would not back down about those charges.  After many months and different individuals at HMRC being involved, they accepted their error and revoked all but a small part of the penalty.  Even while the matters were under discussion, HMRC’s computer automatically referred the disputed sum to external debt collectors.  HMRC informed us that this was standard practice and also informed us that they could not dis-instruct the debt collectors until such time as the Revenue’s computer showed the amounts being paid or waived.  We finally got the agreement of all amounts to be waived with the exception of a very small sum which would have to be argued with a different team.  That small sum was paid.  This was not because it was necessarily due but rather to close the case.  You can imagine that it was stressful for the client and a waste of both mine and HMRC’s time.

One would like to think that HMRC’s review of the automatic penalty regime would be expanded into other penalty provisions to help prevent the repeat of cases like those above. However given the importance of patterns of behaviour I shall still be encouraging my clients to meet all their deadlines.