In ICAEW REP 45/25, ICAEW has responded to the government’s consultation on the reform of the penalties that may be charged where: 

• a tax return or other document sent to HMRC contains an inaccuracy; or 
• a taxpayer fails to notify HMRC of circumstances that affect their tax liability.  

The government is considering the following approaches:  

• reforming the existing framework to simplify how penalties are calculated and applied; and
• exploring an alternative model that would improve clarity and consistency. 

The government is also open to combining elements of both approaches if it is felt that this is the “best path to create a penalty system that is fairer, simpler, and more effective”.  

ICAEW agrees with HMRC that the current penalty regime is complex and in urgent need of simplification. As a general principle, ICAEW believes that the purpose of the penalty regime should be to influence behaviour, rather than to raise revenue. The behavioural focus should be both to deter non-compliance in the future and to encourage taxpayers to come forward to correct non-compliance in the past. 

ICAEW recommends that HMRC: 

• Considers whether the “bolt-ons” to the penalty regime made over time have had the desired effect and if not, remove them. ICAEW believes that the introduction of  rules to discourage specific behaviours have added complexity to the regime.
• Clarifies what constitutes a “prompt” for the purposes of determining the size of the penalties that are charged. This area has become more complicated as HMRC has explored new channels for interacting with taxpayers, including one-to-many letters.
• Reviews those situations where multiple penalties can arise. This can give the impression that the intention is to raise revenue rather than encourage behavioural change.
• Improves the training of its staff and the guidance in its manuals to ensure that  penalties are applied consistently. 
• Ensures that any changes made to the penalty regime apply immediately to all open years. This will prevent multiple regimes applying concurrently to different tax years.