Over a number of months Carline Lucas MP has asked a series of parliamentary questions seeking to secure information regarding the penalties paid by companies that fail to file their corporation tax returns on time. The questions, some of which were repeated in slightly varying forms to seek to seek elaboration, and the answers supplied, are recorded in a PDF here.
The best interpretation of the answers secured from David Gauke, the Exchequer Secretary, was as follows:
An average of 272,000 companies a year were penalised for late submission of corporation tax returns during the four year period surveyed, although this was on a sharply downward trend, which is the result, according to the Exchequer Secretary of “HMRC improv[ing] the way they identify companies that are asked to file a return so that returns are not requested from companies that are not active” although no evidence has been provided to support this claim.
During the tax year 2009-10 an exceptional value of old debt appears to have been cleared from the HMRC debt ledgers although David Gauke says “HMRC does not 'waive' penalties," claiming instead "that every penalty imposed is either paid, pursued for payment, discharged on successful appeal, or remitted as an uncollectible debt”. Again, the evidence does not support this claim.
Taking into account the figures he has provided for debt, penalties imposed, cash paid and bad debt written off the amount that must have been waived each year to make the system balance must have been as high as £260 million; a figure in excess of the penalties imposed in any year.
It is impossible to believe that the write off of this sum resulted from appeals from companies who were so bad at corresponding with HMRC that they had already neglected to submit their corporation tax returns: it is obvious that HMRC do waive corporation tax penalties despite the Exchequer Secretary's claim to the contrary. The sums in question have fallen but still amounted to over £70 million in each of the last two tax years.
When this sum for penalties written off is combined with the amount of bad debt relating to these penalties each year the total sum lost over the four years comes to £945.4 million— or 99.9% of all corporation tax penalties imposed over that same period, a sum calculated by dividing £945.4m divided by the total of £946 million in penalties charged.
And even after that staggering loss £140 million of penalties were still owing at 31 March 2013 —a figure bigger than the total tax penalties charged in the previous year, suggesting there was significant more loss to come.
What is very obvious is that for the sake of proper systems, procedures and sufficient staff HMRC is losing millions of pounds a year when at the same time it is doing its very best to reduce its staffing of people capable of pursuing this debt as fast as it possibly can.
Its interesting to think what could have been done with that lost £1 billion. It is also very easy to see if this happens how a significant part of the loss I detail in my new report 'In the Shade might occur. The management of HMRC obviously have not and have instead spent their time telling the Guardian, as they did yesterday, that:
We are extremely good at identifying companies which need to send in a tax return, pursuing overdue returns and generally protecting tax payable when a return doesn't appear.
The only reasonable response to that claim in the light of the evidence is that it's seriously wide of the mark when it comes to factual accuracy because if you can't get the penalty you also have not got the tax return. (See also, here).
It really would help if we had a tax authority that gave straight answers to questions in this country. It would be the first step in tackling the tax gap.
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In my experience the vast majority of late filing penalties are issued in error and are cancelled after a call or letter to HMRC pointing out their mistake.
Of course my experience may not be typical.
Are you sure you aren’t talking about individuals, where I think that is at least in part true?
It’s true of both, but more so with company returns. At least with individuals there is a normal due date for returns; with companies the due date varies between companies, and that for a particular company can change from one year to the next.
I have to say I have never, ever, experienced an inappropriate request for a CT return but have very definitely done so for individuals. I am surprised by your claim and candidly can’t see a basis for it. What is it? Are you always changing company names and year ends? Or what?
I’m talking about late filing penalties, not requests for CT returns.
I’m thinking of cases where HMRC have agreed a company is dormant and so needn’t submit returns for 5 years, followed by a penalty the next year; changes of accounting date on acquisition by a new group with a different year end, where we’ve told HMRC, they’ve said they’d update their records, and they evidently haven’t; companies being liquidated and still getting late filing penalties; that sort of thing.
It almost always comes down to HMRC’s records being wrong, for one reason or another. I’m very much looking forward to being able to update them myself, it’s just a shame that project is a few years off.
Noted
But in that case the stats on the number of live companies being asked for returns are even worse than I have suggested which might make the scale of evasion even worse
No, I suspect it would push the numbers the other way: I think there are more truly dormant companies out there than show up on HMRC’s systems as dormant, and more than you think.
That is an utterly illogical answer
There is a finite population of companies
If duplicate companies are being asked for returns more companies that might be due to make them are not
I’m not talking about duplicate requests for returns, I’m talking about penalties being issued where they’re inappropriate.
Any connection between penalties being issued and companies not submitting returns at all is an entirely different matter.
Richard
Whilst I agree with your general point about only a small percentage of penalties being collected, I have a couple of questions about your methodology.
1. I can’t work out where you got the debt brought forward number from for 09/10. Maybe I’m being stupid but it isn’t shown in the ministerial replies. As the Penalties reduced on appeal number is a balancing number, which depends on the b/f number, I can’t see how they can both be balancing numbers.
2. You mention that the £140m still owing at 12/13 end is greater than the penalties charged in the previous year. Unless £140m is greater than £154m I cannot see how this is a correct statement.
3. Don’t you think that the 99.9% number is a little flawed? You are comparing the total amounts written off through appeal and bad debt for 09-13 with the amounts charged for the same period. As amounts are likely to be written off in the next year you are not really comparing like with like, particularly given that amounts charged appear to be falling. I could equally say that £108m of cash has been collected in the period, and £946m of penalties have been issued, giving a recovery of 11%. It still wouldn’t be very accurate. However, it still does show a low recovery.
4. It is impossible to judge whether HMRC is really letting people off or just making mistakes in the first place until you know what percentage of penalties are related to error in the first place (ie to dormant companies). Maybe worth asking a follow up question to the Chancellor?
Will
All fair points
Apologies for 2009/10. That comes from a 2011 parliamentary answer I have not referenced again and can’t right now as I am on a train with a lousy connection. But it came from Gauke
Your second point looks right – I will correct in due course
I recognise in the text this data can be used in various ways. The best estimate would be 89% lost
It us not impossible to tell if the data is just mistaken: the population of companies is known and for example in 2011/12 270,000 did not submit returns and about 272,000 penalties were issued. I reckon that gives room for maybe 2,000 errors. I think we can ignore that (I stress, numbers are quoted from memory as on train)
Thanks Richard,
That clears those points up.
Thanks as well
Does that 270,000 include companies that weren’t expected to submit returns because HMRC know they were dormant? If so, you can’t really draw any conclusions here.
2,000 penalties issued in error is far too low a number. Unless I’m a massive outlier compared to the average (or HMRC have been deliberately targetting my clients!), I’d extrapolate from my experience to a six-figure number of errors each year.
OK, rechcking your report no it doesn’t – but it would include companies where a CT603 is issued and then no return is actually submitted because HMRC agree that no return is needed, before a penalty is issued.
I think you’ve over-simplified the position: there are more possible situations for a company to be in than you envisage.
One point that may be missed here Richard – your analysis above doesn’t appear to note the value of penalties displaced on submission of the return where no actual liability to tax arises (with only the fixed penalties remaining in point) or if the tax was settled in absence of the return. Some of these arising on 6 month determinations with tax gearing in point would be of high value and could have a material impact if not factored in.
I cover lard returns in the report
I think these are covered by HMRC data on settlement and appeal