Penalties and taxes

  • Date : June 2010
ABOUT THE AUTHOR: Martyn Gowar TEP is a Partner in McDermott, Will & Emery UK LLP and an Editor of the STEP Journal

I was very worried when I recently read a report in the paper, which had the headline: ‘Man owed £1000 tax rebate is fined £1400 for getting his sums wrong.’ Now, my experience is never to believe what I read in the newspaper and certainly to distrust the headline, but it is a reminder that we need to be extremely watchful about the introduction of the new system of penalties being charged by HMRC.

This all goes back to the merger of the Inland Revenue and of Customs & Excise in the UK. At that time it seemed to those in the UK that customs officers believed everyone was a smuggler and the enforcement regimes were designed with that in mind. But by and large, income taxes had a more civilised and civil law based approach. Indeed, capital taxes, and in particular inheritance tax and its predecessors, were almost gentlemanly!

Now the UK has a one-size-fits-all approach, and while one can understand the thinking behind that, I think we all know that one size garments do not actually fit all!

I think that what concerns me is that the system that is currently operating in the UK has lost a sense of a mutuality of respect and trust between taxpayer and tax collector. I have long objected, bitterly, to the change whereby interest on tax owed to the Inland Revenue is charged at a higher rate than interest on overpaid tax due to the taxpayer. The argument was that this reflected the position an individual is in with regards a bank. But the relationship between taxpayer and the Inland Revenue should not be not that of banker and customer, but of equal contracting parties.

The system that is currently operating in the UK has lost a sense of a mutuality of respect and trust between taxpayer and tax collector

The professional bodies have been very concerned about the new penalty regime and there are stories that suggest that HMRC is taking a hard line on valuations being put into inheritance tax returns when either the asset is sold for significantly more shortly after death, or assets are under-declared or undeclared. The standard expected of an executor leads a number of us to question whether any professional person should ever take on an executorship, because it raises the question that, if penalties are imposed, are they personal and can they be recovered from the estate assets? Beneficiaries may have something to say if a penalty is imposed and then collected out of the estate assets. We all know that there are many cases where it is just so hard to be able to judge whether we have put in all the details – however hard we try to find out.

HMRC says that it certainly does not want to discourage professionals from taking on executorships and indeed it would be madness for it to do so. But then when we hear about someone who has overpaid tax and claims a rebate being fined more than the rebate he is entitled to get then, absent fraud, you can see why the UK professional community is becoming increasingly concerned.

Can I ask all of you practising in the UK to keep a vigilant look out for examples where penalties are claimed on a basis that seems to you to be manifestly unfair. Please tell STEP, because there are more important principles at stake than the administrative convenience of a merged HMRC!


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