HMRC suggest penalty points system for Making Tax Digital
HMRC’s vision for transforming our tax system into a more effective, more efficient and easier one for taxpayers, ie Making Tax Digital (MTD), will inevitably require changes to the way tax is administered.
Tax administration which covers tax returns, assessments, claims, data gathering, compliance, interest, penalties, information powers, appeals and time limits, will need to adapt as MTD is introduced. With this in mind, HMRC has launched one of six MTD consultation documents titled, ‘Making Tax Digital: Tax administration’, which seeks comments on how to adapt existing administration powers and focuses on proposed changes required in next year’s Finance Bill.
MTD, so say HMRC, will help taxpayers get their tax affairs right first time with digital ‘prompts’ and ‘nudges’ alerting individuals to common errors, inconsistencies or missing information, so allowing a person to correct them. It will be introduced in phases, with April 2018 being the landmark date for income tax and NIC. VAT and corporation tax will follow in April 2019 and April 2020 respectively.
Late submission penalties
It will be a requirement under MTD for most businesses to provide HMRC with regular updates of income and expenses. A businesses taxable profit will need to be finalised for a period through their End of Year declaration.
HMRC has sought to design a simple but proportionate points-based penalty system that would:
- ensure taxpayers are not charged a penalty the first time they are unintentionally late in complying with a submission obligation;
- draw taxpayers’ attention to their failure and consequences for penalty purposes, giving them the opportunity to put right their wrongs and to avoid a penalty being charged; and
- take account of their history of compliance with their submission obligations.
Under this model a taxpayer would incur one or more penalty points each time they failed to submit information on line, including the End of Year declaration. As soon as these points reach a certain level that person would become liable to a penalty.
Type of penalty
Rather than a tax related penalty that is used in cases of tax return inaccuracies, HMRC favour a fixed amount as it is more straightforward and easier to understand. Such a penalty could be tiered so that larger businesses pay more.
For those who deliberately fail to make a submission however, a tax-geared penalty will be levied which would be calculated as a percentage of the tax that would have been due if the submission had been made but would also take account of any fixed penalty charged under the points-based system.
Illustration:
| Month | Quarterly obligation | Penalty points | Penalty points accumulated |
|---|---|---|---|
| July | Q1 missed | ||
| August | 1 | 1 | |
| September | |||
| October | Q2 missed | ||
| November | 1 | 2 | |
| December | |||
| January | Q3 missed | ||
| February | 1 | 3 | |
| March | |||
| April | Q4 missed | ||
| May | 1 | 4 | |
| Penalty charged |
The points total would remain unchanged until the taxpayer achieved 24 months of unblemished compliance. HMRC did consider a 12-month period but came to the conclusion that this would be far too short for those with annual submission obligations. Of course they did! However, the Revenue have asked the question whether people feel 24 months is appropriate.
This system would be unsuitable for occasional obligations, such as the filing of Inheritance Tax returns.
For those with multiple submission obligations, e.g business taxes and PAYE, this system would mean that a taxpayer who has continued to accrue points for one kind of submission, could be charged a penalty the first time they were late for a different submission obligation.
Safeguards
Reviews, appeals and reasonable excuse provisions will continue to apply to penalties as is the case now. If one or more of the points is removed because the taxpayer had a reasonable excuse, causing the total number of points to fall below the level that makes the person liable to a penalty, then the penalty would be cancelled.
Late payment sanctions
HMRC will treat payment obligations as distinct and separate from obligations to submit information and are proposing two new sanctions for late paid tax:
- The use of penalty interest to be charged to those who fail to pay in full within 14 days of the due date, or who before that date have failed to enter into arrangements to pay over an agreed period.
- Revision of existing legislation to align the penalty regime for income tax, VAT and corporation tax.
Penalty interest would be charged in addition to late payment interest as is the case with Self-Assessment. The interest rate would be higher than that charged for commercial bank loans and would fluctuate in accordance with changes to the Bank of England base rate.
Late payment interest
There currently exist different rules for the regimes covered by MTD and HMRC are inviting views about aligning the rules across income tax, VAT and corporation tax.
Closing date for comments is 7th November 2016.
Good to see that HMRC is working on the penalties part of MTD first before doing anything that actually helps people calculate and pay their taxes with the least amount of complexity. They make it very clear where their priorities lie….