Posted by James Pearson on 12 Sep 2012
Disproportionate HRMC Penalties
A recent taxation article has highlighted a growing trend within HM Revenue & Customs (HMRC) to enforce the letter of the law even in cases where it is arguably not just or proportional to do so.
An example of this behaviour is a current case concerning a Value Added Tax (VAT) registered partnership that incorporated into a limited company. VAT returns continued to be submitted on time and all VAT was paid (one payment was a day late, but every other payment was made punctually). The tax payer did not inform HMRC of the incorporation and HMRC has seized the chance to charge a penalty for this oversight. Since this small error did not result in any VAT being underpaid you might think that any penalty charged would be relatively small. HMRC did not agree and initially tried to charge a penalty of £42,176 for this error. Negotiations reduced the penalty down to £10,544 but HMRC was not willing to reduce it further and the case is now before the First-tier Tribunal.
While this is an extreme case it does illustrate that in the current climate HMRC is not likely to pass up any opportunity to charge penalties, for even the most innocuous error. It demonstrates that any change in the nature of a business, any alteration in how the business is structured, needs to be discussed with a tax adviser to make sure there is no opportunity for HMRC to harshly apply the penalty regime.
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