HMRC penalties and debt recovery powers in 2021: An overview for contractors

Over the past 15 years, HMRC has increased their powers to recover unpaid tax and charge penalties, where it is considered there was either a failure to take reasonable care or HMRC were deliberately misled, writes John Hood, head of tax dispute resolutions at Moore Kingston Smith LLP.

The penalty regime has also become more complex, depending on which year the liability relates to and where the assets that generated the income or gains are based; the UK or overseas. 

HMRC penalties? They’re unprecedented

This is best highlighted by the new powers to recover tax and charge significantly higher penalties (up to 200%) for liabilities relating to offshore assets. These new powers are unprecedented and demonstrate that the balance has most definitely shifted in HMRC’s favour.

HMRC can charge tax-geared penalties where it is determined the person was careless or acted deliberately. While genuine mistakes or errors do not attract tax-geared penalties, HMRC has raised the bar in civil investigations and compliance checks, instructing their compliance people to 1) seek penalties in a higher percentage of cases and 2) pursue higher penalties.

Anecdotal evidence may concern some contractors

There is anecdotal evidence that HMRC has been seeking to charge penalties on the basis that the person acted deliberately in a higher number of cases, which can lead to several issues – the level of penalty is significantly higher, regulated persons may need to report themselves to their professional body and there is a danger that where the tax owed is over £25,000, the person faces being ‘named and shamed’ by HMRC.

It’s important to note that the type of behaviour impacts the number of years HMRC will seek to go back to recover taxes. The standard time limit is four years for a mistake, six years for carelessness and 20 years where tax was deliberately evaded.

Telling, Helping and Giving

Timing is key. It’s essential when HMRC start a compliance check that any irregularities are brought to HMRC’s attention as soon as possible. Cooperation with HMRC about the extent of the issue is also vital to ensure that the penalty is reduced as much as it can be. This is commonly called ‘Telling, Helping and Giving’ HMRC the information they require and can result in the penalty being reduced by up to 50% of the maximum penalty that can be charged.

Remember, the burden of proof rests with HMRC to demonstrate that the person acted either carelessly or deliberately. Anyone facing a tax-geared penalty should be provided with a detailed explanation of how HMRC determined the penalty. 

How to keep HMRC penalties to a minimum

It’s good practice to carefully consider the explanations and seek clarification on any points disputed or not accepted. By challenging the penalty decision it may be possible to agree a lower penalty or, in cases where careless behaviour is involved, to agree the relevant conditions for the penalty to be suspended.

One of the most important points to consider are the circumstances which led to the tax being paid late. If the issue was voluntarily disclosed and not prompted by HMRC, the level of penalty can be significantly reduced.  It is important to note that once HMRC has written to the person to start a compliance check, it will be difficult to persuade the officer that any disclosure was unprompted and voluntary. 

Unfortunately, there are inevitably situations where HMRC’s view is disputed. Taxpayers can ask that the investigator’s decision be reviewed by an independent officer, not previously connected with the compliance check. If unsuccessful, Alternative Dispute Resolution (a form of mediation) may assist in reaching agreement and there is also the opportunity to ask the tax tribunal to consider if the penalties applied are correct. 

The key take away is that by taking the right steps, a penalty may be avoided or at least kept to a minimum. Seek specialist advice when needed and don’t be afraid to question HMRC’s decision.

Collecting tax debts post-covid-19

One other area relevant to contractors where HMRC has recently published guidance is the collection of tax debts. Guidance issued on June 30th reassures people that while tax debts are now more actively being pursued, they can still negotiate Time to Pay, and the best advice is to contact HMRC and negotiate a more affordable timetable. Fortunately, HMRC has committed to exploring a range of options to help. While this may be considered by some to be a ‘leap of faith’, if HMRC feel that they are being ignored, it is likely they will use their enforcement and recovery powers. 

Currently, HMRC are keen to work with people and are being more flexible as to how the debts are collected. While it may feel counter-intuitive to approach HMRC, it is important to remember that they will not have forgotten about the debt and at some point they will come knocking – so, in my experience, it’s best to contact them before the recovery of the debt is enforced.