HMRC, the stick and the carrot

Can HMRC's aggressive stance towards individual taxpayers be counterproductive?

Frustrated of Essex

It is no secret, especially not on this blog, that I have been frustrated by HMRC's attitude towards those who found out at a late stage that tax had been under-recovered from their pensions etc. and they had a significant tax bill. Even though HMRC has had the power under ESC A19 to “forgive” the tax paid, in the last couple of years they have steadfastly refused claims and appeal which would have been accepted prior to 2011.

We know that HMRC is under extreme pressure to collect as much as possible. I understand that, and let me be clear, I think everyone should pay their fair share according to the law. I wrote last July:

“I would like to see all dishonest tax-dodgers caught. The so-called black economy consisting of people who offer to re-lay your drive or clean your house soffits and fascias for cash and all the other “cash-in-hand” people who knock on your door cost the country billions in lost tax.”

It is just that in some areas, HMRC, and maybe Government, have lost track of what might be fair with regard to honest taxpayers, those who out themselves from the black economy, and others whose tax affairs are in arrears and they seek to get themselves up to date.

My own patch

In my own practice, there are areas of taxation I do not enjoy, do not regard as my strengths, and which I pass to others. No one can gain the experience to be strong in all areas of tax because there just isn't time, whether one is a practitioner in private practice like me, or an employee.

I have two or three favourite areas or niches of tax that I do specialise in. One of those is in helping”delinquent” taxpayers, which usually means those who have not paid tax recently, to get themselves up to date and to negotiate a decent settlement with HMRC.

Those who have been “caught” by HMRC are in worse position from the point of view of the penalty regime than those who come forward voluntarily. That is understandable, but I can still help them in agreeing their back-tax, interest and penalties and getting a settlement with HMRC.

A puzzle

Those making voluntary disclosures should be entitled to better treatment with lower penalties. What has worried me recently is that in one case, where the individual simply did not have the means to pay all his tax (of course his fault) HMRC preferred to make him bankrupt with a lower tax recovery than if they had agreed his offer of payment of a quite significantly greater amount over three years. HMRC preferred less jam today than the more jam they might have had tomorrow, and by making anyone bankrupt they have to join the queue with the other creditors. I thought this was pretty silly.

Late return penalties

Another issue is the new daily penalties regime introduced by HMRC from 2010-11, and I quote them;

“Following a review of HM Revenue and Customs powers new legislation was introduced. Under Schedule 55 Finance Act 2009 the way in which HMRC applies its late filing penalties saw major changes particularly in respect of raising Daily Penalties. This change only applied to Tax returns for 2010-11 onwards with the previous legislation and guidance remaining for 2009-10 and earlier.

Where a customer has not filed a Tax return 3 months from the return due date Daily penalties will start to accrue for a period up to 90 days at a rate of £10.00 per day, the rate is fixed and can not be changed (except by legislation) and in the majority of cases this will be an automatic process. There is no longer a requirement to apply to the Tribunal to charge a Daily Penalty or for a “fixed £100 penalty” to have been charged before applying it. A Revenue Determination can be considered at any time during the period of which a Tax return remains outstanding but it is not a requirement before a Daily Penalty is applied.”

Note the irony of calling someone a customer and then in the same sentence imposing daily penalties.

Disincentive

My concern is that the daily penalties may be a disincentive to comply in some circumstances. Someone more itinerant “self-employed” might, if the penalty notice catches up with them, be less inclined to let HMRC know where they are. Also, not everyone who works in the UK was born here or even has strong ties to the UK. Many, in the face of threats, will melt away whence they came, or to some other jurisdiction. Of course the individual amounts of tax lost each time might be small, but in a fluid situation of cross-border working, I think the penalty regime may be a disincentive to comply, especially if the first a worker knows of her or his obligations is the penalty notice rather than the original notice to complete a tax return.

Particularly with the taxation of individuals I believe HMRC should take a more pragmatic approach to collecting tax, by which I mean adopting methods to collect more through negotiation, rather than less tax through preferring the stick over the carrot.

Of course everyone should meet their tax obligations under the law. Punishing especially those who have come clean or have just got behind with their tax affairs, at the expense of lowering the overall tax take, seems rather foolish.

Common sense?

I believe there is a case for removing most of the penalties imposed for late submission of Returns once they are submitted, with perhaps HMRC raising their interest rate charge for late-paid tax. I also think more common sense should be applied where an individual simply cannot meet their tax obligations. I would not want to encourage anyone to dodge their responsibilities; rather I would hope they should face up to them with more encouragement.

How do you feel about HMRC's aggressive stance? Do you believe it is counterproductive?

Be responsible and pay your tax

Last Spring I wrote a piece entitled “Render unto Caesar...” which pretty much sets out my view concerning tax avoidance and those who are reluctant to pay tax. For the record I reiterate that I have no objection to people taking sensible uncomplicated steps to pay less tax. That is no different from choosing to fill your car with petrol, diesel or gas at a particular establishment which charges a little less than the one down the road. Daily essentials everyone buys on price because the value is the same. Complicated and artificial tax avoidance schemes really have no place in a responsible society.

There is a moral case to pay a fair share of tax. We may not like a particular Government but we all use the infrastructure, the roads, education, the health service and so on, and we should cough up according to our fair share. There are occasional refuseniks who choose to withhold a portion e.g. of their perceived share of the defence budget, quoting moral grounds, and they may at least appear principled if foolhardy in making a futile stand against the system, though at least gaining publicity for their cause.

What really gets my goat is those who dodge the system, take cash so that it does not go through their books and appear in their accounts (“save the VAT, mate?”) and those who fiddle in other ways, such as inflating their business expenses. None of these people are clients of us professional practitioners of course, because if we sign them up they are in the system they wish to avoid, and subject to our scrutiny.

Just the same, it is certain that there are still many tax dodgers and if any are reading this, let me tell you that if you have dodged £5,000 of tax you have stolen it from the Government and from us taxpayers and it is no different from stealing £5,000 from the state-owned Post Office. The punishment on getting caught may not be the same, but perhaps it should be? It is money taken from our back pockets.

The financial penalties for tax evasion have been raised subject to various targeted initiatives in particular areas. Should we see more custodial sentences? How can more dishonest tax evaders be caught given the limited resources of HMRC? What do you think?

© Jon Stow 2010

Fairer and more reasonable - equitable liability survives

Not all was bad news in the Pre-Budget Report. I wrote in September about HM Revenue & Customs' intention to abolish the practice of Equitable Liability. I said that if HMRC thought they did not have a legal basis for this discretionary power then legislation could correct this. Mr. Darling is to introduce just such a measure.

I think this is a rare victory for the taxpayer and I congratulate Keith Gordon for his campaign and petition which I feel must have contributed to this change of heart.