Examination of Witnesses (Questions 80-99)
HM REVENUE AND
CUSTOMS
1 MARCH 2006
Q80 Kitty Ussher: I just wanted to
ask you a little bit about the penalties that you impose on companies
who have not complied or who have been negligent. I am being negligent
myself by focusing on the Executive Summary which is paragraph
eight, page two. Could you just perhaps, by way of introduction,
say a little bit about where you can impose penalties? Do you
feel that this is an area where you could get a greater return
to the taxpayer by imposing greater or more extensive penalties?
Sir David Varney: We can impose
a penalty, but we have to meet three tests. We have to show that
an incorrect tax return has been submitted. It has resulted in
a tax difference and the error arises from the negligence of the
taxpayer. Negligence has a fairly specific definition. It is the
omission to do something which a prudent and reasonable man would
do—or woman. That leads us into some quite interesting areas.
If a company relies on its professional advisers and that professional
adviser has given advice and it follows that advice and that advice
turns out to be wrong, we probably would not be able to sustain
a penalty because he had reasonably taken advice. In terms of
the inquiries settled in 2004-05, penalties were imposed in 51%
of the full cases and only 5% of the aspect cases. That reflects
in a sense that the full inquiries would have produced something
where we thought a penalty was appropriate; an aspect one we could
have resolved fairly quickly or come to a conclusion that there
was some reasonable doubt.
Q81 Kitty Ussher: Do you think the
regulations should be changed, in particular around the issue
of advisers? What you have just said seems intellectually unsatisfactory.
Sir David Varney: Parliament was
trying to strike a balance between what we can do in terms of
penalties. We are looking at it in terms of the powers' review
and what I hope we are going to see in the powers' review is that
we shall be granted powers which are commensurate with the job
we have to do and this will be one of them that we shall look
at in the context of the wider powers. I rather favour taking
a balanced view so that we have a coherent statement of powers
which are commensurate with a modern HMRC, rather than what I
have at the moment which is that I can only exercise the powers
of the income tax commissioners or of the revenue commissioners.
Q82 Kitty Ussher: Fixed penalties
seem to be incredibly low compared with the turnover of the companies,
that is the fixed penalties for not supplying information. Do
you think, yes or no, that they should be increased?
Sir David Varney: It is an initial
penalty of £50 plus £30 per day. Obviously if you are
a company of reasonable size, this is a relatively modest inconvenience.
If we start to get penalties from you for failing to answer our
inquiries, we are likely to become rather closer acquaintances
than we might hitherto have been.
Q83 Mr Davidson: Paragraph 2.12 says
". . . random enquiries detected errors by companies in around
40% of returns". Can you tell me whether or not that was
20% paying too much, 20% paying too little or was there a different
balance?
Sir David Varney: About 4% of
the cases account for about 75% of the tax which we felt was from
that population. So if you look at the 40% and take that as 100%,
we think 4% of that 40% was responsible for 75% of the tax that
was underpaid.
Q84 Mr Davidson: That was not quite
my question.
Sir David Varney: I know; but
to be honest, I do not have the figures. We can look, if a note
would be helpful.
Q85 Mr Davidson: Because if it were
20:20, you would think that was just . . .
Sir David Varney: No, this is
net. The number I am giving you is net. I cannot give you the
proportion of how many, although help may be coming quickly.
Mr Banyard: The vast majority
of the cases have an adjustment in our favour. A small number
have the adjustment in the taxpayer's favour.
Q86 Mr Davidson: I must confess that
was what I had thought: around 40% of people are underpaying their
tax in those circumstances. In the Report that we have here of
the three most commonly mentioned types of underpayment, of error,
business receipts being understated is the first. Understatement
of business receipts does not seem to me to be an error. That
seems to be a deliberate deceit or a fraud. Is that not a fair
way of looking at it?
Sir David Varney: It is one way
of looking at it. Some people's book-keeping and record-keeping
might leave something to be desired.
Q87 Mr Davidson: Indeed it might.
Sir David Varney: You have gone
to one element, but in some cases it might actually be just carelessness
and misunderstanding and somebody not really understanding what
their duties are.
Q88 Mr Davidson: I do understand
that point, but you would expect in those circumstances, would
you not, that of the cases where there was a misstatement, if
it was just random, half would be paying too much and half would
be paying too little? When they are consistently understating
the business receipts, that would seem to be more deliberate,
would it not?
Sir David Varney: When you think
about how you overstate the revenue, that is a different act than
understating. There is almost no incentive in the system for overstating
your revenue.
Q89 Mr Davidson: Indeed if there
were an incentive in the system to understate your revenue, then
you would manage to avoid paying tax, would you not?
Sir David Varney: Yes.
Q90 Mr Davidson: So if you manage
to avoid paying tax, it is hardly reasonable to assess that as
an error, is it really? That is a fraud.
Sir David Varney: It depends on
the nature of the individual case. When I gave you the figures
on the full enquiries, I said that, in 51% of the full inquiries
we have run, we have come to the conclusion that a penalty should
be levied.
Q91 Mr Davidson: I shall come onto
penalties in a minute. The second example of the most common errors
is the owner's personal expenses being included in the company's
accounts. That does not seem to me to be the sort of thing that
is random, that sometimes they have paid too much and sometimes
they have paid too little. That smacks to me of fraud as well.
The third one is loans made to directors without being taxed.
That does not seem to me to be an error; that seems to me to be
a fraud. Why I am asking this is that I have dealt with you in
tax credit cases as well and you seem to be very moderate and
reasonable and forgiving here, but you are not quite as reasonable
and moderate and forgiving when it comes to tax credits and underpayments
and overpayments in those circumstances. I am not quite sure why
you seem to be applying a different set of standards here, where
you are basically big softies, and on tax credits you are really
quite tough. You are tough on poor people and soft on prosperous
people. That is the assessment that I come to. Does that seem
to you to be unreasonable?
Sir David Varney: Yes; absolutely.
Q92 Mr Davidson: I thought it might.
Sir David Varney: Good. I am glad
we can agree on something. We are not forgiving errors. We have
identified where in these corporates there is tax liability to
be made. We will levy penalties if we think they are justified
and we will change the risk assessment. As regards new tax credits,
this is my tenth visit to a select committee in the 184 days you
have sat since 1 September and I have had plenty of opportunity
to account for and explain new tax credits, the stance we are
taking and I have answered a number of letters from MPs. In some
cases the thing I really would apologise for is the low standard
of service we have been able to offer.
Q93 Mr Davidson: I do not want to
be unduly diverted, but it is this question of the differential
in standards. You do seem to be exceptionally understanding and
forgiving on things that I assume to be frauds.
Sir David Varney: I do not think
we are.
Q94 Mr Davidson: Let me just come
on to the question of penalties then. What are the penalties as
compared with, say, the tax avoided in terms of the balance of
risk? If I am considering whether or not I should put some of
my personal expenses in the company's accounts, if the penalty
is 1% of the amount that I might have gained by a tax fiddle,
that is an acceptable risk. If it is 1,000% then I am certainly
going to be much more hesitant about it. Can you give me an indication
of the balance of penalties to money at risk?
Sir David Varney: If we find that
there is a tax liability, we will collect the tax, we will collect
interest and we will levy penalties up to 100% of the tax that
was due.
Q95 Mr Davidson: So the maximum penalty
I could get is the same again?
Sir David Varney: Yes.
Q96 Mr Davidson: Well that is not
bad.
Sir David Varney: Plus interest.
Q97 Mr Davidson: Well that seems
a pretty good bet to me actually.
Sir David Varney: We will bear
it in mind when we come to your return.
Q98 Mr Davidson: Thank you. I thought
you did not comment on the affairs of individual taxpayers.
Sir David Varney: True. I was
not.
Q99 Mr Davidson: I take that point.
I ought to say, Chairman, in terms of declarations of interest,
that I am not now nor have I ever been an accountant. I have been
married 30 years and I suppose you never know your spouse entirely,
but to the best of my knowledge she is not an accountant either.
May I come to the question of good faith, this accepting advice
in good faith? If I am coming out of a public house and somebody
says to me, who is maybe a doctor, that I have only had 25 pints
of lager so am perfectly acceptable for driving and I drive off
and argue that I took that advice in good faith, I suspect I would
not get away with it. I remember when I used to be in a local
authority that when we wanted legal advice, we would shop about
until we got the legal advice that we wanted. I suspect very much
that it is pretty much the same with tax accountants: you get
one tax accountant who does not help you particularly, so you
go off and get another tax accountant. In these circumstances,
if particular accountants are found to be consistently making
the same sort of errors when they are caught, what happens in
those circumstances about the accountant?
Sir David Varney: We have to operate
the penalties within the law that has been laid down and the law
as laid down provides that if it is reasonable to accept professional
advice, then we cannot levy a penalty. Clearly, if we see a behaviour
pattern from a firm of accountants or groups of accountants which
is systematically giving cause for concern, we would talk to them.
If we were more seriously concerned, we would raise it with their
professional body.
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