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Tax practitioners' views on HMRC powers

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The CIOT and ATT have recently published the results of their member survey on HMRC powers. Questions were asked about penalties, compliance checks and reviews. The results indicate that there are parts of the system that are not operating as well as had been hoped, which supports the need for HMRC’s current review of penalties. Particular concerns were raised about how HMRC treats errors as failure to take reasonable care and how often suspension of penalties is offered. Comments on late filing and late payment penalties reveal general concerns about fairness and proportionality. 

During February 2015, we conducted a survey of CIOT and ATT members into HMRC powers asking questions about penalties, compliance checks and reviews. This was the second time we had surveyed our members on this topic, our first survey into HMRC powers having taken place in early 2010 not long after the changes in Finance Acts 2007, 2008 and 2009 had come into operation.

The results of our first survey had indicated that the new regime was being introduced in a gradual and measured way although experience of the new powers was inevitably limited in the early days for both HMRC staff and tax professionals.

Five years into the regime, our latest survey has provided the opportunity for us to assess how our members are finding the penalty regime working in practice. We also asked about HMRC compliance checks (both formal enquiries under TMA 1970 and requests for information under FA Sch 36), as well as seeking views on HMRC’s statutory internal review process and alternative dispute resolution (ADR) service.

Our second survey reveals that there are parts of the system which are not functioning as well as we would have hoped. There were such a wide variety of responses to the question on how HMRC treat errors as failure to take reasonable care that we think that the whole area of behavioural penalties under FA 2007 Sch 24 should be reappraised. In particular, we suggest that work is required on how behaviour is demonstrated and evaluated, as there appear to be inconsistencies in how HMRC is applying the legislation. Similarly, the survey reveals some inconsistencies in how suspension of penalties is offered.

We thought at the time of our first survey that the newly introduced framework would set the tone for the next 20 to 40 years. However, only five years on, we are already seeing that the focus of the system may need to be re-assessed with the move to further digitisation of the tax system and the difficulties that automated fixed penalties, in particular, can create. Many comments support the need for a consideration of changes to the legislation, with many members expressing concerns about the fairness and proportionality of late filing and late payment penalties.

We therefore welcome HMRC’s recent penalties consultation document, HMRC penalties: a discussion document, as the start of engagement with the tax profession on transforming the penalties regime so it is fit for purpose overall and not only for the digital future.

Penalties for incorrect returns: failure to take reasonable care

The range of responses indicated a wide range of experience of how HMRC are applying this legislation. This may be due to inconsistencies in practice amongst HMRC officers and across different taxes. We think further research is required into how behavioural penalties are assessed and that the current guidance needs to be revisited.

Responses to the question; ‘Where your clients have made an error how often have HMRC treated this as a failure to take reasonable care?’ revealed that most respondents (58.5%) report that HMRC treat an error as a failure to take reasonable care in less than 50% of cases. However, 41.5% of respondents report that this occurs in 50% or more of cases, including 26.4% who say that HMRC proceed in this manner in over 75% of cases.

Many respondents commented that, where a mistake has been made, they think HMRC are too quick to conclude that there has been a failure to take reasonable care, rather than an innocent error.

‘Often, the client makes an honest mistake or genuinely forgets something or misunderstands. HMRC usually say this is careless. In many of these cases, the client really has done their best and it is just human error’.

‘HMRC do give the impression of charging a penalty and then calling it careless, regardless. You then have to prove it was a simple mistake’.

Respondents report a mixed experience of successfully negotiating a penalty with HMRC with just over half (53%) having successfully negotiated a penalty in over 50% of cases. However, some comments suggest that this may be due to some HMRC officers initially setting a high penalty leaving room for the agent to argue this down to a number that is acceptable to HMRC.

Although most respondents (73.1%) think that decisions by HMRC on suspension of penalties are by and large fair, and the conditions imposed are appropriate, there were also a number of comments complaining that practices in this area can be inconsistent.

‘HMRC do not apply the penalties consistently - we had two identical cases both ideal cases for suspension, in one circumstance HMRC offered a suspension, in the other HMRC imposed the penalty and would not oblige to suspension’

A small majority of replies (53.2%) say that suspension is secured in 50% or less of cases where suspension is possible, while 44% say that the agent/taxpayer had to ask for suspension. It appears that HMRC could do more to raise awareness of the suspension process and apply it on a consistent basis.

Late filing and late payment penalties

A frequent comment was that penalising normally compliant taxpayers for one-off errors is unfair, as the system does not treat them any differently than persistent late filers/payers. It was suggested that penalties could be increased for repeat offenders.

‘I have a client who is about to be surcharged £250 for late payment of £5,000 2013/14 tax, and is upset about it. This is a very willingly compliant taxpayer, who only missed paying the tax by accident’.

Some were of the view that rigidly imposing fixed penalties for late returns might actually discourage compliance if penalties are perceived to be unfair and disproportionate.

Many responses expressed dissatisfaction that the current late filing penalty regime for self-assessment tax returns imposes a penalty even where there is no outstanding tax liability,

‘Late filing penalties need to be reformed, so that there are no penalties if no tax is due’.

On the other hand, there were several comments that the £100 penalty was not a strong enough incentive for some taxpayers to file on time.

Compliance checks

Respondents reported that on the whole the compliance check system was working in an acceptable way, HMRC’s letters were clear and understandable, and requests for information were appropriate in terms of subject matter and detail.
However, many commented that the questions asked by HMRC can sometimes be unreasonable and vague, requesting information that, had they given the matter some thought, officers would realise is irrelevant and unnecessary for the purposes of checking the taxpayer’s tax position.

‘Notices are badly drafted, in particular too widely drafted’ and ‘Increase in requests for items not directly relevant to checking the return’

A recurring theme continuing from the first survey were the comments about the attitude and competence of HMRC staff conducting enquiries, and what is perceived as poor training and supervision.

‘The need for improved technical training, and improved commercial awareness amongst HMRC staff is increasingly apparent’.

We point out that many advisers will have little face to face contact with HMRC throughout the course of a typical year, so the comments may represent only a very small number of HMRC staff but it does emphasise the point that a poorly handled intervention can unfortunately colour an adviser’s view of the whole department, whereas a well handled enquiry can lead to full and positive engagement next time around.

The length of time it can take for HMRC to deal with correspondence was also a source for complaint. This is not new. Most advisers would welcome an improvement in turnaround times in correspondence and HMRC moving to email communications wherever practicable.

Discovery assessments

The number of respondents who had experience of discovery assessments (37.2%) suggests the need for a proper review of the law in this area. Additionally, 42.7% had seen HMRC issue an assessment which they described as a ‘protective assessment’ and the term’ discovery enquiry’ seems to be used with some regularity despite the term having no legal basis.

We recommend that HMRC provide adequate guidance to officers to ensure that unfounded assessments are not issued without proper legal justification.

HMRC’s internal statutory review process

A small number of respondents (109 – 23.9% of those responding) had experience of using HMRC’s statutory review process. Of these, 73.4% told us that the HMRC reviewer did not request any additional information before reaching their decision although doing so could have enabled a more thorough consideration of the case at the review stage. We think this may explain why the tribunal (with the benefit of more or better particulars) will often reach a different decision.

52.9% told us that they had found the process fair and reasonable (even though they did not necessarily get the result they were hoping for). However, there were many comments from respondents who expressed dissatisfaction with the process, believing it to be merely a ‘rubber stamping exercise’.

‘My experience of the review team leads me to believe that it does not take an independent view’.

Other complaints were about the lack of feedback from HMRC about the outcome of the review and that decisions were still upheld even where HMRC officers have acted in contravention of their own guidance.

HMRC’s ADR process

Only 18.1% of respondents had used ADR, but of these, nearly three-quarters (71.6%) said that they found the process fair and reasonable (again, even if they did not necessarily get the result they were hoping for). This accords with the positive feedback we have already received from members about the process.

Where members have had poor experiences of ADR often this was because they felt that the HMRC team had not approached ADR with an open mind.

The small number of respondents who had used ADR may indicate that there is lack of knowledge about the process both amongst agents and within HMRC. We would like to see HMRC publicise and promote ADR more and also think about how its scope could be widened.


We are very grateful to our members who took the time to complete the survey. It has produced some valuable data about how HMRC powers are operating in practice. We have sent the results to HMRC, and we hope that HMRC will continue to engage with us and the rest of the tax profession on achieving a powers regime that is fit for purpose. We are sure that the evidence which the review has presented will considerably assist in that process.

For the full results, click here.