Making Tax Digital: What might HMRC’s penalties model look like?

Despite the uncertainty following the general election, the Making Tax Digital (MTD) initiative is still expected to be rolled out in April 2018 in accordance with the original time frame.

In preparation of this, HMRC is fleshing out the details of the system of late submission and late payment penalties, which are due to go into effect in April 2019 after a year-long grace period to give customers the chance to familiarise themselves with MTD.

From 20 March – 11 June, HMRC ran a consultation proposing and seeking views on three different late submission models.

The first is a points-based system, in which customers would receive a point each time they failed to make a submission on time. After an accumulation of a certain number of points, a penalty would be charged. The points would reset after a period of compliance. HMRC has revised this model from an earlier proposal to apply per tax rather than across all taxes.

The second is a regular review system, in which HMRC would carry out an automated regular review of customers’ compliance. In this model, a customer would be given penalties based on their record of compliance. There would be no penalty for the first failure during the set period.

The third proposal outlined by HMRC is a suspension of penalties system, in which a customer would be given an extended period of time in which to complete the submission and avoid the penalty. In this system, there would also be no penalty for the first failure.

In their response to the consultation, the Association of Taxation Technicians (ATT) voiced support for the second proposal – the suspension of penalties system.

Yvette Nunn, co-chair of ATT’s technical steering group, explained: “We see it as the simplest for taxpayers to understand, the fairest in that it quickly alerts taxpayers to what they need to do to avoid a penalty and the most effective in encouraging a return to compliance following a taxpayer’s submission failure.”

In its consultation, HMRC explained that there would be a limited number of penalty suspensions to avoid customers establishing a pattern of repeated late submissions.

ATT put forth a suggestion of a “limited shelf life” for the tally of extensions given, and after an appropriate period of time, such as a year, the customer’s record of suspended penalties would be erased.

Nunn added that the 12-month grace period before penalties come into effect may not be enough, stating: “Any new penalty system has to have a soft landing to avoid it being seen by taxpayers as a revenue raiser. We think that the initial penalty-free period should be longer than 12-months so that taxpayers have experience of a full MTD cycle.”

While the consultation was primarily concerned with the late submissions model, it also proposed penalty interest as a sanction for late payment of corporation tax, income tax and VAT. Separate to this, HMRC charges late payment interest (2.75% for main taxes and duties­). HMRC differentiated the two payments as the late payment interest is technically not a sanction for late payment.

ATT criticised this move on the grounds of unnecessary confusion, as although HMRC outlines precise differences to the two payments, for customers it would be “a distinction without a difference”.

Nunn added: “On late payment interest, we see no practical merit in HMRC simultaneously charging a taxpayer two different rates of interest on the same overdue tax. Simplicity and effectiveness both point to the benefit of a single penalty rate. In terms of timing, we think that the penalty rate should apply once the tax is overdue by 30 days, rather than the 14 days proposed by HMRC.

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