HMRC urged to reform behavioural penalty system

In response to a government consultation, HMRC is being urged to simplify behavioural tax penalties to improve compliance.

A reform in the behavioural penalty system could help to incentivise more taxpayers to come forward to disclose their errors.

That’s according to the Chartered Institute of Taxation (CIOT), which has suggested a regime that does not penalise the first careless error, but puts the taxpayer on notice that future errors will attract penalties.

Ellen Milner, CIOT Director of Public Policy, said, “A caution model is the simpler solution. It could also work well at shaping future behaviour, particularly if it has an educational focus, and it would avoid the need for a suspension regime, which over the years has proved challenging to administer.

“We are concerned that an automatic suspension model would have the unintended consequence of discouraging voluntary disclosures of subsequent errors because taxpayers might not want to admit them in the suspension period if it means that the original penalty is then payable on top of a penalty for the subsequent error.”

Other CIOT suggestions include:

• A warning against increasing penalty rates for deliberate behaviour and introducing penalty escalation for repeated deliberate behaviour – increasing penalties risks disincentivising disclosures and encouraging lower levels of co-operation.
• Supporting the simplification of offshore penalties. It no longer makes sense to punish non-compliance connected to regulated overseas jurisdictions more harshly than purely UK non-compliance, now that there are sophisticated data sharing mechanisms in place with most overseas countries.
• Supporting the removal of minimum 10% penalties for errors disclosed after three years, agreeing that there is scope for simplifying penalty reductions for the type and quality of disclosures – but emphasises the necessity of having a clear definition for “unprompted” and “prompted” disclosures.

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