Unfair treatment of low earners highlights the need for tax reform

HMRC is fining 180,000 people a year for late filing – even though they don’t earn enough to pay tax.

Last week saw shocking statistics publicised showing that, between 2018 and 2022, HMRC charged 420,000 penalties on people with incomes too low to owe any tax. These people were erroneously told to file a tax return, and because they didn’t file on time, they received a penalty of at least £100. In most cases, that amounted to more than half their weekly income.

HMRC handed out more than 660,000 fines to people on low incomes in the last four tax years, according to analysis of the data. A large number of these fines were thrown out on appeal. For example, in the 2020-21 tax year, the number of fines was reduced by 30% from 180,000 to 126,000 due to successful challenges.

The figures were reported by Tax Policy Associates (TPA), a pressure group set up by Dan Neidle, a former tax lawyer turned activist. He says that the scale of the problem that his Freedom of Information (FoI) request uncovered leaves no doubt that HMRC must look seriously at how its current systems and processes are dealing with the low paid and how they are treated.

Fines have heaped pressure on individuals

“The figures are amazing,” Neidle says. “On an immediate human level, it has created a really serious problem for those involved – we have one example where someone was made homeless, and there are other examples of people ending up thousands of pounds in debt.

“And of course, from another perspective, you have to ask whether this is a good use of HMRC’s resources: every moment that’s spent trying to collect a penalty from someone earning less than the personal allowance is a waste of time.” The news that the Self Assessment Helpline is to be ‘temporarily’ suspended for three months this summer only adds to the concern.

This goes to the heart of the matter, and brings into stark focus the current challenges facing HMRC, and raises serious questions over how the Revenue is targeting its stretched resources.

HMRC’s priorities are wrong

AAT has argued persistently that HMRC must not only be adequately resourced but that it must target the right areas.

Those areas include targeting significant systematic tax avoidance and evasion, ensuring the right systems and processes are in place to help taxpayers, focusing on effective compliance activity and, finally, supporting and working with the profession in our efforts to improve tax compliance and collection.

The scale of the figures also highlights the importance of a coherent tax system. It’s an issue we have flagged up in the past, especially when the announcement was made that the Office of Tax Simplification was to be scrapped. We were sceptical then – arguing that the OTS performed a vital function as a check against unnecessary complexity creeping into the tax system – and we remain so now.

Neidle is not alone in his frustration at the lack of fairness in the current status quo. He is also not the only one calling for HMRC to make a significant effort to review its processes.

Time to act

“I think they should use their discretion to try and solve the problem as soon as they can, and try and void as many penalties as possible,” he says. And he goes further: “They could also start collecting more careful data on these people and why they’re getting self-assessment forms in the first place – could they prevent this happening at Step 1 and being more selective on who gets a notice to complete a return, for instance?”

But he admits HMRC alone cannot deliver the lasting change needed. “MPs need to act to put pressure on HMRC to do this and to agitate for a change in the law so that we can go back to where things were to cap penalties based on people’s income.”

There’s little doubt that any system that unfairly penalises so many people in the first place has fundamental problems – and upholding an equally troubling number of appeals is not the solution.

TPA’s figures shine a harsh light on what can go wrong when a tax administration system is starved of sufficient resources and allowed to become too complex and ineffective. We can only hope they are taken seriously by the right people.

AAT is keen to hear from members about their experiences in dealing with HMRC in this area. Please contact Adam Harper to share your views.

Adam Harper is AAT's Director of Professional Standards & Policy..