Minutes of Consultative Committee Meeting
of 06 July 2005

Attendees

Simon Norris (acting Chair, HMRC), Dave Hartnett (until 1030), Stephen Alambritis, Philip Baker QC OBE, David Cruickshank, Penny Hamilton, Mike Hardwick, , John Hasseldine, Liz Lathwood, Adam Little, Edward Troup (HMT) Chas Roy-Chowdhury, Matthew Nelson (HMRC), Dave Stephens (HMRC), Rachel Tann (HMRC), Linda Whewell (HMRC)

Apologies

Roderick Cordara QC (Independent), Richard Excell (TUC) Teresa Graham OBE Small Business Council, Francesca Lagerberg (ICAE&W), Anthony Leonard QC Criminal Bar.

Contents

Responses to the Consultative Documents on Powers and Small Business

Responses to the Consultative Document and the emerging themes were being analysed and a summary will be prepared for publication on the HMRC website.

Major relevant themes in the responses to consultation ‘ Working Towards a New Relationship’ were:

  • The administrative burden of tax compliance and how this relates to complexity/simplification of the tax regimes;
  • Clarification of payment dates for different taxes with harmonisation and synchronisation as the aim
  • Powers around enquiry work. Smaller businesses being keen on ‘joined up’ visits/inspections, with larger businesses favouring separate approaches for the different heads of tax.

The following points were raised:

  • Whilst addressing perceived complexities in the tax regimes is not for this review, the links between complexity and compliance need to be recognised. Complexity can lead to incorrect returns where it leaves too much scope for different interpretations and can also hinder timely filing.
  • Should the review reassess the balance between conventional perceptions of powers/sanctions and inducements to compliance?

Priorities

As part of its work programme through to October 2005 the Committee will consider:

  • initial papers outlining the issues; followed by
  • ‘options’ setting out the alternatives for going forward (taking account of the Committee’s comments, thoughts, reactions and suggestions in response to the initial paper); followed by
  • ‘proposals’ in response to the Committee’s deliberations on the various options for taking matters forward.

The process will be one which, meeting by meeting, will allow issues and proposals to be discussed and refined.

Penalties in general

A number of general propositions and thoughts in relation to penalties were advanced.

  • Regularising inconsistencies between the penalties applying across the different regimes administered by HMRC is a major task. Regularising the position across all regimes in line with new recommendations would be the ideal.
  • The importance of simplicity was stressed.
  • Ideally, penalty responses to similar behaviours ought to be consistent across the various regimes administered by HMRC.
  • Such uniformity is more desirable for ‘value’ non-compliance; (e.g. if £x is lost to the Exchequer due to neglect it should not matter in which regime that neglect occurred). But for ‘procedural’ non-compliance, (e.g. late filing) there may be a need for different penalty responses across the various regimes.
  • A discussion took place about capping penalties and the lessons to be drawn from international comparisons.
  • The concept of ‘reasonable excuse’ should be retained.

Penalties for Under-declarations and Over-claims

Discussion of the issues gave rise to the following propositions and questions.

  • Should those who come forward unprompted be penalised at all?
  • The system should be more forgiving of ‘mistakes’ and there was some discussion of whether straightforward error should be penalised at all.
  • Amnesties are not necessarily a helpful device in encouraging better future compliance as they can alienate existing compliant taxpayers.
  • Leaving aside tax amnesties, would the compliant majority be alienated by the forgiveness of any penalty for those who ‘come clean’ voluntarily and pay the tax they owe?
  • Could ‘innocent mistakes’ be dealt with through a ‘totting-up’ system so that isolated ‘innocent mistakes’ are not penalised; e.g. no penalty unless there is more than one such mistake in a given period?
  • Particularly for larger entities who regularly review their systems, self-discovery of a pattern of innocent errors can be indicative of ‘thoughtfulness’ and a desire to improve and ensure compliance. A ‘totting-up’ system that penalised recognition of such patterns could be counter-productive.
  • Those with tax to pay for past errors consider ‘interest’ to be a penalty.
  • There was a broad consensus that the culpable overstatement of losses should be penalised. However, whilst some thought that the overstatement should be penalised at the point where it was discovered, others favoured a penalty that would bite only if and when there was an imminent Exchequer loss. Another view was to enquire into losses only when a claim is made to set them off against liability.
  • It was agreed that further discussion of the various issues, including how to deal with culpably over-stated losses, was best left to await papers setting out examples and options.

Abatement and Mitigation

Views differed as to whether the graduation of penalties for a succession of offences and/or for degrees of culpability should be in statute or could best be left to administrative procedures of Abatement/Mitigation. Clarity was felt the prime advantage of a statutory approach.

It was, however, possible that a single maximum penalty encompassing all degrees of culpability may be a better option as it would allow HMRC to abate/mitigate the maximum penalty to reflect the nature of the offence – e.g. careless error, wilful negligence, deliberate understatement etc. An appropriate maximum penalty may or may not be equal to the current 100% maximum.

So far as there is abatement/mitigation, the factors taken into account should be similar across the various tax regimes. However, the value applied to those factors might need to differ between regimes. An example is the abatement/mitigation given to disclosure which might need to be higher or lower to reflect differences in the likelihood of detection across different regimes.

Late-filing/non-filing of ITSA Returns

Various points, observations and issues were raised:

  • The ITSA filing period is, at 10 months, very generous compared to those in of other countries. Yet some of those countries (e.g. USA) have a stronger culture of timely filing.
  • Whilst penalties are necessary, they are not the only mechanism to encourage timely filing. It was suggested that an important and complementary factor is the removal, or at least lowering, of barriers to timely filing. Making it all easier will help to encourage earlier filing.
  • The existing system might encourage deferring filing until the last minute, potentially leading to more cases where the deadline is missed. An example given is the carry-back provision for gift aid which encourages delayed filing.
  • Tying the enquiry window to the delivery of the return and not the statutory filing date might encourage earlier filing.
  • Whilst the National Audit Office report recommends changes to the penalty regime for ITSA filing failures, it also highlights a lack of information about how frequently elements of the existing penalties regime were used and so how effective those elements are.
  • Consideration should be given to a regime that mirrors aspects of VAT default surcharge.