Making Tax Digital penalty system out for review

With 12 months to go until the start of quarterly reporting under Making Tax Digital, the government has set out three options for the new penalty regime for non compliance ranging from a points-based system to annual HMRC compliance checks although the fines, which could be up to £3,000 for those who keep no financial records, will not kick in immediately

For the worst offenders, those who essentially keep no financial records at all, the potential fine could be up to £3,000.

The more regular fines for late submission have not been set. Currently there is a £100 fine for a late self assessment submission. 

Unlike the current penalty system which issues penalties as soon as a filing deadline is late, one of the proposals is that the fines for Making Tax Digital would operate on a tiered points-based system.

The government has already confirmed that taxpayers will be given a minimum period of 12 months from when they become subject to quarterly reporting before the new late submission penalty comes into effect.

This is meant to give people time to get used to the new reporting requirements which will administrative time and costs to businesses, and mark a radical change in the current annual reporting requirements.

The consultation document does not set out the size of the fines, although the draft Finance Bill 2017 issued today stated that fines would be capped at £3,000 for partners or persons not complying with quarterly reporting.  

Following preliminary discussions, HMRC has set out three options for the penalty regime, one based on the initial plan to operate a points-based model, although this has now been tweaked so that the points are allocated per tax, not across the whole tax regime as frequently different parts of a business are responsible for reporting different taxes so this could lead to excessive penalties. 

The options under consideration are a points-based system, annual HMRC automated IT compliance review or a suspended penalties system.

Option 1 - Points-based system

This is a revision of the points-based model proposed in the last consultation, but it now applies per tax, rather than across all taxes.

The taxpayer would receive a point each time they failed to provide a submission on time. When the points reach a certain threshold, a penalty would be charged. The points are reset after a period of good compliance.

The system is likely to allow for three non-compliance incidents before a penalty kicks in, according to the example provided in the consultation document. Following a penalty, if the taxpayer then meets all the reporting deadlines over a ‘sustained period’, their slate is cleared and they would start anew without accumulative penalties. HMRC states: ‘A sustained period means that a number of submissions are provided on time for a set period.’

HMRC proposes that the period of good compliance required to reset the points total to zero would be:

Submission frequencyGood compliance period - number of submissions
Annual2
Quarterly4
Monthly6

So, for example, if the length of the period of ‘good behaviour’ is 24 months, for a taxpayer reporting income tax under self assessment, two timely submissions would negate the accumulated penalties and reset the clock to zero points.

‘If we reduced the requirement for customers with annual obligations too they would only need to provide one submission on time. One submission received on time does not amount to the development of a good habit. Accordingly, we consider it appropriate to retain the requirement of 24 months of sustained good compliance (now expressed as two submissions) for customers making one submission a year,’ HMRC states in the consultation document.

There is some ambiguity around the timing issue, with HMRC accepting that there were concerns in the initial feedback to the original proposals for the penalty regime, about the practicalities of the system and the length of the so-called ‘good behaviour’ window.

The HMRC consultation states: ‘Points are designed to ensure that isolated failures do not attract a penalty. But where the desired improvement in filing takes place, resetting points to zero rewards that improvement and encourages the establishment of a firm habit of providing submissions on time.’

Option 2 - Annual HMRC review of compliance

Under this proposal, HMRC would carry out an automated regular review of the taxpayer’s compliance with submission obligations once a year. The review would be carried out tax by tax.

There would be no penalty for the first failure during the set period. If there are further defaults a penalty would be charged at the time of the review, based on the number of failures.

HMRC proposes ‘that for customers who provide an annual submission (for example, an annual VAT return or income tax self assessment return) the review would be carried out within two months of the deadline for providing the submission’.

This would enable the penalty to be based on the customer’s history of compliance with their submission obligations. It allows for several failures to be subsumed into a single penalty meaning the penalty might be charged some time after an individual failure to which it relates.

Taxpayers would be contacted once a missed submission was identified and they would be given the opportunity to remedy their tax affairs.

The penalty would be for failure to quarterly report, and not for the annual return which will be treated differently. The document states that there ‘would be different rules for annual obligations’.

The compliance regime for the annual regime is not straightforward so the government has set out three options for the timing of this annual review:

  • treat the end of period statement for the previous period of account as one of the submissions obligations occurring during the period of account being reviewed;
  • carry out the review after the due date for the end-of period statement; or
  • review compliance with the obligation to provide regular updates and the obligation to provide an end of period statement separately.

Option 3 – Suspended penalties - suspension of first penalty

HMRC would not charge a penalty immediately on the first failure. Instead it would suspend the penalty on condition that the customer provides the outstanding submission within a specified time. The document hints that taxpayers would have two late submissions before a fine kicks in.

Suspension could be applied on more than one occasion but ‘it is not the government’s intention to encourage taxpayers 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’, the consultation states.

The suspension approach was first mooted in a 2015 consultation, HMRC Penalties.

When the first failure happens the taxpayer would receive a notice advising them that:

  1. they did not provide the submission on time and are liable to a penalty, but
  2. HMRC would not charge the taxpayer on condition that they provide the outstanding submission within a specified time. If the condition was not met the penalty would be charged.

Penalty regime

Penalties will be applied where a taxpayer has failed to meet an obligation and does not have a reasonable excuse for doing so. There will be a right of appeal against all penalties and the recording of failures that do not, immediately, give rise to a penalty (eg, failures that cause the issue of points or that are taken into consideration at the time of the review of compliance).

Size of fines

There are no details about the size of the fines although the draft Finance Bill states that a maximum fine of £3,000 would be applied if a partner in a partnership did not comply with quarterly reporting requirements.

Consultation documents and closing date for comment

The 24-page consultation, Making Tax Digital: sanctions for late submission and late payment, will be open for 12 weeks until 11 June.

The consultation, Making Tax Digital: sanctions for late submission and late payment, is available here

The consultation also provides an update on late payment penalty interest as a sanction for late payment of income tax, corporation tax and VAT.

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