Since the introduction of the new penalty regime for tax inaccuracies some 10 years ago, HMRC has hitherto encouraged taxpayer co-operation by being able and willing, where appropriate, to grant full abatement down to the minimum percentage penalty levels set out in tax legislation. In this way, for example, taxpayers who came forward voluntarily after making tax return errors which are no more than ‘careless’ have secured a nil penalty if they told HMRC about the irregularity, helped HMRC in putting things right and gave access to documentation which HMRC asked to see.
The playing field has now changed because HMRC has decided that, in both ‘unprompted’ and ‘prompted’ investigation cases, the legislation permits a restriction to the penalty abatement if the disclosure goes back more than three years. In such circumstances a minimum 10 per cent penalty will apply on top of the minimum behaviour-based penalty level.
We have doubts as to the legal basis for this new HMRC interpretation. However, if correct it means that the position is potentially very serious for those whose irregularities are deemed ‘deliberate’. The consequences go beyond the mere increase in the level of financial penalty. Where the cumulative tax understated since April 2010 is more than £25,000, the behaviour is deliberate and the maximum abatement is not available, the taxpayer will be publicly ‘named and shamed’ by HMRC.
HMRC’s long-established Code of Practice 9 (COP9) procedure for serious evasion relies on taxpayer co-operation. Those suspected of tax fraud and investigated under COP9 enter into a contract with HMRC. They accept that deliberate evasion has occurred in exchange for HMRC agreeing not to pursue a criminal investigation. Arguably, the COP9 process cannot work effectively unless the taxpayer, having admitted deliberate actions, commissions a disclosure report to identify and quantify all tax irregularities. By so doing, HMRC’s input into the investigation process is kept to a minimum. The taxpayer’s agent does most of the work.
Until now it has been possible for the taxpayer to expect to achieve maximum penalty abatement by ensuring that co-operation is faultless. In this way, the tax evader is encouraged to make the COP9 process work. However, in COP9 cases going forward, it appears that a 10 per cent penalty addition to the minimum ‘deliberate’ penalty percentage will now apply. HMRC will achieve this by restricting the abatement, meaning that most COP9 tax settlements will result in the taxpayer being publicly named and shamed.
What about those taxpayers who are the subject of an ongoing COP9 investigation? If they are co-operating fully in anticipation of staying outside of the naming and shaming regime, is it right that HMRC’s change of view will now result in them unexpectedly being named and shamed?
We call upon HMRC to provide urgent clarification of its new policy, not only from the taxpayer’s perspective but also from their own standpoint, as surely it is in the department’s own interest to ensure the continued smooth operation of the COP9 process.