HMRC outlines points-based penalty model for MTD

HMRC has published details of the penalties system for late submissions and payments under Making Tax Digital, confirming it plans to pursue a points-based model.

Earlier this year HMRC ran a consultation on three potential penalties models: points-based, regular review of compliance and suspension of penalties.

In its report HMRC stated that a large majority of respondents favoured the points-based model due to its comparative simplicity, which was of chief importance.

The Chartered Institute of Taxation (CIOT) has welcomed HMRC’s revised points-based penalty model, which addressed many of the concerns put forward in the consultation.

Features of the model

Under this model, customers would receive a point every time they fail to submit on time. A penalty will be charged at a certain threshold, which will be dependent on the frequency of their submission obligations. After the threshold has been reached, a penalty will be charged for every subsequent submission failure.

The penalty thresholds put forward are: 2 points for annual submissions, 4 points for quarterly submissions and 5 points for monthly submissions.

One amendment to the model following the consultation is that penalty points will have a shelf-life and would expire after a period of good compliance.

Periods of good compliance were outlined by HMRC as: 2 submissions for annual submissions, 4 for quarterly, and 6 for monthly.

John Cullinane, Tax Policy Director at CIOT welcomed this change, commenting: “The original proposals with their lack of a shelf-life for points would likely have been ineffective as well as unfair because there would have been little incentive to improve one’s behaviour if points stuck with you for too long regardless of your ongoing compliance.”

Cullinane also stressed the necessity of points being clearly visible, so that taxpayers are aware of how many points they have and can avoid accumulating further points.

He added: “HMRC’s communications in educating taxpayers about MTD and their new compliance obligations, as well as the quality of its digital systems, will be critical to the smooth operation of the regime.”

HMRC also clarified that a separate points total per tax is preferable, rather than one points total relating to all obligations. This is because it is simpler and reflects business structure, where different departments may be responsible for different taxes.

To incentivise individuals for good behaviour, HMRC have said they will make penalty points and actual penalties appealable, and give taxpayers the option to claim a reasonable excuse for failing to meet a filing obligation.

While CIOT advocate for an appealable system, Cullinane recognises that “this will create a significant practical challenge for HMRC’s systems, and the Tribunals.”

“The appeals system will need to be largely automated, to cope with what could be a huge number of appeals, given the increased number of filing obligations that MTD requires from taxpayers, but must be easy to use, fair and free from manipulation.”

Draft legislation is expected in summer 2018, and CIOT anticipates that the model will first be implemented for VAT in 2020, to give taxpayers a year to become familiar with the system following the first MTD intake in April 2019.