Penalties imposed by HMRC on taxpayers have jumped by nearly a third, from £445m to £571m in just one year, according to fresh HMRC data, shared exclusively with City A.M. today.
The primary reason behind this jump is HMRC increasingly clamping down on tax avoidance as part of its efforts to make up for revenue lost during the pandemic, said experts at tax investigation insurance firm PfP, which analysed the data.
As well as a drop in tax take caused by the slowdown of the economy during Covid, the Government also invested heavily in programmes like furlough to help the economy through the lockdown.
According to the Public Accounts Committee, the Government has lost at least £15bn in tax-related fraud and error due to Covid. An increase in the number of tax investigations being opened by HMRC is inevitably leading to more penalties.
Up until recently, HMRC had been exercising a considerable degree of forbearance towards individuals falling behind on their tax affairs.
However, the end of the pandemic has caused a noticeable shift as HMRC returns to business as usual.
Kevin Igoe, Managing Director at PfP, said one other way HMRC could potentially boost its income is by moving taxpayers that have made a mistake with their tax returns from one category of penalties to a harsher category.
For example, HMRC has some leeway to decide whether an individual should face a penalty for failing to take “reasonable care” or a bigger penalty for making a “deliberate” error. HMRC calculates the severity of its penalties using several categories.
Firstly, If a penalty arises due to a lack of reasonable care, the penalty will be between 0 per cent and 30 per cent of the unpaid tax due or secondly, if an error is deliberate, the penalty will be between 20 per cent and 70 per cent of the unpaid tax due,
Finally, if an error is deliberate and concealed, the penalty will be between 30 per cent and 100 per cent of the unpaid tax due.
“HMRC itself is under a lot of pressure to fill the hole in the country’s finances due to the pandemic, so it is becoming more aggressive in going after undeclared tax.”Kevin Igoe
Igoe added that taxpayers will start to see their tax affairs even more heavily scrutinised as in-person visits and property searches get back up to their pre-Covid levels.
“The huge spike in penalties shows HMRC is ramping up pressure on taxpayers in arrears. It is likely the number of tax investigations will rise as a result,” Igoe concluded.