HMRC penalties: discussion document summary of responses

18 September 2015

HMRC has published their response to the discussion document which considered how they can change how penalties are applied as they transform their services to deliver more through digital technology.


HMRC published HMRC Penalties: a discussion document in February 2015 which asked for comments on how the application of penalties may be changed to better differentiate between deliberate and persistent non-compliers and those who might make an occasional error for whom alternative interventions are more appropriate. The purpose of the discussion being to seek views on the policy design and any suitable possible alternatives, before consulting later on a specific proposal for reform.

The discussion document proposed five broad principles that HMRC consider should underpin any new penalty regime:

  • The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent noncompliance. Penalties are not to be applied with the objective of raising revenues.
  • Penalties should be proportionate to the offence and may take into account past behaviour.
  • Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.
  • Penalties must provide a credible threat. If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.
  • Customers should see a consistent and standardised approach. Variations will be those necessary to take into account customer behaviours and particular taxes.


The consultation generated a lot of interest and respondents were supportive of the early engagement on this potentially difficult subject, and all were in broad agreement with the five principles.

Many pointed out the potential tensions that exist between having a proportionate and fair system for individual taxpayers, whilst ensuring a consistent and standardised approach. There were differing views about the best overall penalty model with some favouring a greater use of interest in place of penalties, or suggesting adjustments to the current regime. Many were interested in exploring what the penalty model might look like.

Chapter 2 of the response document sets out the questions posed in the discussion document and summarises the responses given, which included:

  • views expressed by almost all respondents that an ideal penalty system is one that is simple, flexible, proportionate, appropriate and tailored; a system in which penalties are only issued where they are deserved;
  • encouragement from over a third of respondents that HMRC should review its current approach to reasonable excuse and special reduction as hurdles to qualify are often too high to get over;
  • views received from more than a quarter of respondents that decisions about behaviour and reductions for disclosure (both of which have a bearing on the amount of penalty charged) can be subjective, causing inconsistency in the application of penalties;
  • concern expressed by a quarter of respondents that the VAT default surcharge produces very substantial penalties for comparatively trivial transgressions and does not differentiate between payments that are one day or several months late;
  • general support for tailoring the penalty to take account of the customer’s overall compliance position and to reflect the nature or seriousness of the non-compliance rather than applying penalties on a tax-by-tax basis;
  • and general agreement that penalties for first-time offences should ordinarily be suspended, subject to conditions and supported by HMRC-provided education, to encourage future compliance.

Respondents also suggested changes which they considered could improve compliance including:

  • issuing a warning letter (rather than a penalty) to first-time offenders;
  • setting earlier deadlines for non-compliant individuals;
  • staggering the due dates for returns and payments so that the return always falls due before the payment; and
  • refunding penalties if compliance improves within a specified timeframe.

Next steps

Chapter 3 of the response document sets out the conclusions HMRC have come to after analysing the responses.

HMRC will develop a series of options in respect of the review of penalties over the next few months, after which further consultation will take place. Subject to Ministers’ agreement, HMRC would propose to issue firstly a further consultation document on proposals for a new penalty scheme for late filing and late payment and then a document on inaccuracy penalties. If Ministers ultimately decide to proceed to legislation the draft legislation would be consulted on; the earliest possible date for legislation would be Finance Bill 2017.

HMRC will also publish the roadmap for “Making tax easier: The end of the tax return” later this year. HMRC published this document in March 2015 which explained how customers will be able to view and manage their tax information in an online digital account. It outlines how HMRC will use the information it already holds to populate the digital accounts so that customers can deal with their tax affairs quickly and easily.

CIPP comment

The CIPP Policy Team will continue to be involved in all consultation and will keep members and the profession updated accordingly.

CIPP response to HMRC Penalties discussion document – May 2015