Making Tax Digital Penalties: The Plans, Our Response

Friday, June 9, 2017

With less than a year to go until Making Tax Digital descends for many, the Government has set out a series of plans to address late submission penalties. It may be perceived as putting the cart before the horse, for HMRC to focus on determining the penalty process, when the finer detail about MTD is still lacking. Nonetheless, enabling the industry – including the CPAA – to have an opportunity to provide a response, is a welcome step.

The introduction of penalties for late submission and late payment has been raised by HMRC in both August’s Making Tax Digital documentation and January’s response to consultations, where it was acknowledged that more work was needed to agree upon the right model. With a deadline set for earlier this month, individuals, businesses, agents and representative bodies were invited to consider the options and respond to HMRC. This spirit of collaboration with accountants and the wider business community is certainly a welcome step.

HMRC “wants to help businesses get their tax right first time and to prevent them from feeling punished for making honest mistakes”, but there remains much to be done to help both practitioners and their clients reduce the likelihood of errors and non-compliance in quarterly reporting. It will be an interesting journey ahead for all concerned.

Within HMRC’s latest consultation, ‘Making Tax Digital: sanctions for late submission and late payment ‘, published in March, it outlined three possible models for late submission penalties. These are a points-based system, annual HMRC automated IT compliance review, and a suspended penalties system. The CPAA’s MTD Working Group has considered and discussed all options at length.

This article aims to provide some context of the Working Group’s opinions on the options as proposed by HMRC. The conclusion reached was that the final option, suspended penalties, is considered by the CPAA to be the most appropriate and fair scenario. The options are outlined in more detail below, accompanied by a bullet-point summary of the pros and cons of what is proposed.

Points-based system

This first option is a revised points-based model, updated from an earlier incarnation in the last consultation document. It now applies per tax, as opposed to all taxes. So, a penalty point would be applied each time a submission was late or missing, and when the points reach a certain level, a penalty would be issued. To reward and incentivise prompt compliance, after a period of ‘good behaviour’, the points would be reset to zero.

With a little leeway for slip-ups, the system is likely to allow for three incidents of non-compliance before a penalty is issued. Even after a penalty is issued, the taxpayer would have the opportunity to earn their way back into the good graces of HMRC; if they meet all the compliance deadlines over a ‘sustained period’, the points would be reset to zero and their record cleared. There are no details yet on what these timeframes might be, with HMRC stating: ‘A sustained period means that a number of submissions are provided on time for a set period.’

Positives

Negatives

  • The points-based system is relatively easy to understand, like the points system applied to motoring offences.
  • It does not unduly penalise occasional non-compliance, which is almost inevitable in adopting a new system.
  • It allows taxpayers to easily identify how close they are to having a penalty imposed upon them.
  • It could be interpreted by some taxpayers as meaning a certain amount of non-compliance is acceptable or not serious.
  • It does not discourage the initial failure.
  • Taxpayers may become compliant until such a time as any points accrued are removed and then return to being non-compliant. 
  • In the CPAA’s opinion, it is inherently complex and that it is the least fair and effective of all the models proposed.


Annual HMRC review of compliance

The second option would see HMRC undertake a review of the taxpayer’s compliance each year. It would apply tax by tax, rather than a review of all taxes. With some leniency factored in, there would be no penalty for the first non-submission. However, any further failures to comply would incur a penalty, charged at the time of the review and based on the number of failures.

Taxpayers world be contacted once a missed submission was spotted, giving them the opportunity to rectify their mistake. Any resulting penalty would focus on a failure to submit the required quarterly report, but not for the annual return, which will be treated differently. It also allows for several failures to be incorporated into a single penalty, meaning the penalty might be charged after an individual failure to which it relates.

Positives

Negatives

  • This system could be useful in identifying persistent non-compliance.
  • It is likely to be a resource-heavy system.
  • It could be seen as presuming non-compliance. 
  • It potentially creates large penalties for a series of non-compliance incidents, rather than attempting to discourage non-compliance in the first instance.
  • It creates a system where some taxpayers might be unduly subjected to more scrutiny than others.

 

Suspended penalties

The final of the three options, under this system HMRC would not charge a penalty straight away based on the first failure. The penalty would instead become suspended, with the taxpayer notified and given the opportunity to file the missing submission within a specified time. Not confirmed yet, but the document suggests that taxpayers will have a couple of chances to get this right, with two late submissions overlooked before a fine kicks in.

The consultation document outlines that suspension could be applied on more than one occasion, but ‘it is not the government’s intention to encourage customers to establish a pattern of repeatedly providing submissions late, so the number of occasions on which a penalty would be suspended would need to be limited.’

Positives

Negatives

  • This system ensures a penalty is closely linked to the failure.
  • It provides a clear incentive to provide the outstanding submission.
  • It has been used successfully in other areas of taxation.
  • The concept is easy to understand. 
  • Taxpayers may not treat a suspended penalty seriously. 

 

Our response

After considering the options, it is the CPAA’s view that the ‘suspension’ model most appropriately balances fairness, simplicity and effectiveness. Indeed, it could be made even fairer and simpler if taxpayers and agents are able to view the details of any ‘suspension conditions’ and the amount of time available to meet them. We would also like to see guidance provided on how to meet the suspension conditions, to ensure individuals are not unfairly penalised for a misunderstanding.

Of three options, it may be viewed as the more ‘softly, softly’ approach to opt for suspended penalties, but members’ clients have already communicated their desire for a bedding in period with the new system. Draconian penalties do nothing to help the small business owner nor the wider economy and this system would give businesses warning when they stray outside of compliance deadlines – and in real time – and enable them to make a correction.

As a professional body for accountants, the CPAA feels strongly that HMRC needs to consider the priority customers give to the business activities over the record keeping activities – more frequent reporting is only going to add to the burden. Many small businesses will struggle to comply in the early stages, so where a business knows it will be unable to meet a deadline, they should be able to inform HMRC and agree a revised submission date. Where the business does not meet the deadline due to the pressure of day to day trading demands, it would be encouraging if HMRC would treat this as a reasonable excuse.

If the ‘suspension’ model were adopted, the CPAA would encourage HMRC to conduct a further consultation 12 months in, to help better highlight how the model could be adapted to make it fairer, simpler and more effective. A response outlining these points has been submitted to HMRC and we wait with bated breath for the verdict on which will be adopted.

Penalty interest

HMRC is keen to stress that sanctions are “not intended as a means of raising revenue”, but nonetheless there will be financial penalties to “encourage customers to pay on time.” In the 2016 consultation, most respondents preferred the use of penalty interest to a late payment penalty. It was considered fairer than a fixed rate penalty, as it was seen to be proportionate to the period of lateness and the amount of tax outstanding. 

The CPAA’s own view on penalty interest is that:

  • The start date for interest being charged should be 30 days, rather than 14. As stated in the response to the 2016 Consultation, personal factors such as illness, travel and holidays make this policy unfair.
  • Penalty interest should be charged at a rate above the Bank of England Base Rate. The rate of interest charged should be subject to regular review to ensure that it is fair, incentivises the taxpayer to pay HMRC, appropriately penalises late payment and incentivises the taxpayer to correct their behaviour.
  • Communication is vital; there is great scope for improvement in clarity when explaining interest charges to the taxpayer, including the existing online and paper statements of account.
  • HMRC should consider introducing a quick, effective system for dealing with appeals against penalties. Too few appeals are being taken to Tribunals and it is feared that the introduction of MTD will only aggravate this situation.
  • Business activities must take priority over reporting requirements.  Where there are quantifiable business commitments, HMRC should take them into consideration when applying penalties (or considering appeals), especially where the business is starting out or where the business is not used to submitting quarterly information, such as VAT returns.

Furthermore, the CPAA sees a huge opportunity for HMRC to use penalty funds for the benefit of the industry, by ring-fencing income raised from penalties. These funds could be used to improve taxpayer compliance education. It is something that is much needed and the burden currently lies with accountants. This money could provide a much-needed service, lighten the load on accountants and improve the overall standard of compliance.  

The CPAA’s Working Group will continue to meet to discuss issues included penalties and we will report back to members with new developments and opinions. We would also welcome your thoughts and any issues you want to be raised in our interactions with HMRC. Making Tax Digital is the biggest change we all face and it is crucial we all try to ensure it reflects the needs of the accounting and business communities.