HMRC is not having a good start to 2012. First MPs attacked the Revenue en masse for their unfair treatment of freelancers and small businesses while getting cosy with huge corporates. Then, just a few days later attacked again for the woeful failure of its National Insurance Holidays scheme. Now The Independent has published a piece highlighting HMRC’s late filing penalties, which were deemed illegal by Geraint Jones, QC in a Tax Tribunal last September.

The case against HMRC argued that because the Revenue wait several months before informing business owners that their company accounts are overdue – during which time hundreds of pounds worth of fines can accrue – HMRC’s enforcement effectively amounts to a “cash-generating scheme” for the Exchequer.

The Tribunal detailed the problem in its decision:

“HMRC deliberately waits until four months have gone by and does not issue the first interim penalty notice until, as in this case, September of the year of default.  By that time a penalty of £400, being four times £100 per month, is said to be due.”

In his judgement against HMRC, Jones said:

“It is no function of the state to use the penalty system as a cash-generating scheme.

“We have no doubt that any right-thinking member of society would consider that to be unfair and falling very far below the standard of fair dealing expected of an organ of the state.”

The decision – if it is upheld at appeal – will mean up to 100,000 small businesses which have had fines levied against them may be in line for a refund, which could cost HMRC tens of millions of pounds.

HMRC has been under pressure to close what is known as the “tax gap” – the gulf between the amount of tax that should be generated and that which is actually collected. Late last year HMRC announced that its various tax-collecting initiatives had seen income from tax investigations jump a whopping 37%.

Steve Crouch, chief accountant at our parent company Crunch, has acted on the Tribunal decision for several of his clients.

“The problem here is the inconsistency. HMRC issue day-one late filing notifications for CIS, VAT and personal tax returns among other things – so why not in these cases? Similarly, with the cases we’ve contested, some HMRC offices will reduce the fine or cancel it entirely, while others won’t budge. There’s a lack of leadership that’s really worrying.”

Steve added that those facing fines should do their best to launch an appeal, as there is a reasonable chance they will be upheld.