As part of its program in Making Tax Digital (MTD), HMRC has published ‘Making Tax Digital: Tax administration’, this consultation proposes changes to tax administration, i.e. HMRC's powers and penalties, required in Finance Bill 2017 to deliver MTD.
This article summarises the consultation and lists the questions it asks.
Under MTD, taxpayers will
- Provide HMRC with quarterly updates of their income and expenses.
- Still be required to finalise their business’ taxable profit for the year and make an End of Year declaration after make accounting adjustments and claim any reliefs or allowances.
The End of Year declaration replaces the Self Assessment declaration.
There will be a transitional period where taxpayers will be subject to two compliance regime.
It is proposed that the current self assessment compliance and enquiry regime will be adapted for the new regime.
Question 2.1: Do you agree that compliance legislation should be amended to replicate current enquiry powers into the Self Assessment return to the End of Year declaration?
Question 2.2: Do you agree that current HMRC and customer safeguards should also be maintained? Question 2.3: Are there any other options for preserving HMRC’s current enquiry powers in MTD?
Penalties
HMRC suggests two models.
The Basic model
Each failure, i.e. a late filing or a late payment, attracts penalty points which when accumulated will attract a penalty.
- Current inaccuracy penalties will continue to apply.
- Twelve month soft landing on penalties.
Question 3.1 Do you agree that 12 months is an appropriate length of time to allow customers to become familiar with the new obligations before the new penalty regime comes into effect?
- Penalties will apply under an accrued points based system: late filing each quarter = 1 penalty point. 4 points = a penalty.
- 24 month period to file on time and wipe the slate.
Question 3.2: Do you agree that the period to wipe the slate clean should be 24 months? If not, what other period would be appropriate?
Question 3.3: We invite views on the design principles outlined for the points based penalty. For example, do you consider there are any further elements to build in to this basic model?
- Points based on whether return is monthly/quarterly/annual
Question 3.4: At what stage for each of these different submission frequencies should points generate a penalty?
- Some returns, e.g. IHT are one-offs or occasional
Question 3.5: We would welcome comments on whether existing penalties are sufficient to support compliance with occasional filing obligations. If not, what more is needed?
- Some taxpayers will have multiple filing obligations, e.g. accounts (5: 4 in year returns and an end of year declaration), if you are VAT registered (4 VAT returns) and employ a worker (12 FPS returns and up to 12 EPS returns). The proposal is that only 1 point is given for a missed obligation each month. E.g.: VAT return, FPS, EPS and quarterly return for accounts all missed deadline in June, score only 1 point. In Sept quarter file all on time except for PAYE, score 1 point.
Question 3.6: Do you agree that, in principle, a single points total that covers all of the customer’s submission obligations is the right approach?
Question 3.7: Do you agree that the proposal outlined in paragraphs 3.25 to 3.28 is the right way to operate a single points total? If not, what alternative would you suggest that ensures the design of the penalty is kept simple?
Esculator model
- This adds extra points if a return is left outstanding for set periods of time.
- 5 points attract a penalty.
- HMRC admits that this is unsuitable for monthly reporting because points will accumulate very quickly.
Question 3.8: We welcome views on whether the escalator model would be a more effective way of aligning with the five principles described in paragraph 3.2? (applied to encourage compliance, not revenue raising, proportionate, fair, a credible threat, consistent and standardised).
Fixed penalties
- This proposes that penalties should be fixed without regard to tax at stake or size of business.
- Is this aligned to the five principles described in paragraph 3.2? (applied to encourage compliance, not revenue raising, proportionate, fair, a credible threat, consistent and standardised).
Question 3.9: Do you agree that a fixed amount penalty is appropriate?
Question 3.10: Should the amount of fixed penalty reflect the size of a business?
No plans to offer education rather than charging a penalty
- The points-based penalty would give any customer who is unclear about their obligations time to obtain advice about them and meet their future obligations before reaching the stage where a penalty is charged.
Appeal against points
There is no proposal that customers should have the right to appeal against points as they arise.
Question 3.11: Do you agree that points should only become appealable when they have caused a penalty to be charged?
Tax geared penalties
- These would apply if a taxpayer deliberately failed to meet a submission obligation in order to withhold information that would otherwise lead to a tax liability.
- The amount of a tax-geared penalty would be reduced where a customer who has deliberately failed to meet a submission obligation helps us to establish the correct amount of tax due.
Late payment sanctions
- Payment obligations treated, as currently, as distinct and separate from obligations to submit information.
- Penalty interest charged if tax is outstanding fourteen days after the payment due date and where the customer has not entered into, and adhered to, time to pay arrangements.
- The penalty rate of interest should fluctuate with changes to the Bank of England base rate.
Question 4.1: Do you agree that 14 days is an appropriate length of time to allow customers to either pay in full, or make arrangements to do so before penalty interest is charged?
Question 4.2: Do you think that charging penalty interest is the right sanction for non-compliance with payment obligations?
Question 4.3: Are there other commercial models that might be appropriate for us to consider?
Question 4.4: We invite views on the design principles outlined for penalty interest. For example, do you consider there are any further elements to build into this proposal?
Proposal B: revise and align existing late payment penalty regimes
HMRC is considering two models:
Model 1 is based on the existing Income Tax late payment regime: penalties at 5% paid if tax is paid late: 30 days, 60 days, and 12 months late. For VAT, the period would be shorter: 30 days and 60 days and the penalty 3%.
Model 2 is a tapered system, penalties are first at 4%, then 10% and then 15%, for VAT they would be 3% (30 days late) and then 10% (60 days late).
Question 4.5: Does model 1 or model 2 best meet the government’s objective of providing a fair and proportionate response to late payment of tax?
- Late payment interest would be added, no penalties would apply if a time to pay arrangement was made before the first payment became due.
Question 4.6: Do you agree that the timing of late payment penalties should change to reflect the frequency of payment due dates?
Question 4.7: We invite views on the design principles outlined for late payment sanctions. For example, do you consider there are any further elements to build into these proposals?
Question: 4.8: Which proposal best meets the design principles?
Late payment interest
- HMRC proposes to continue with the current rules for Income Tax and Class 4 NICs when MTD starts in April 2018.
Question 5.1: Should the current interest rules for Income Tax and Class 4 National Insurance contributions continue to apply in MTD?
- VAT and Corporation Tax late payment interest: HMRC is considering the alignment of interest rules across income tax, VAT and corporation tax.
Question 5.2: Do you have any initial comments about aligning interest rules across taxes?
Impacts
HMRC says that MTD will allow it to create targeted guidance and tailored prompts for customers. In addition, the government has stated that it is not seeking to increase compliance interventions on the basis of regular updates. So it expect there will be fewer compliance interventions and more digital interactions, for example prompts and nudges, to help customers get things right first time.
Question 6.1: Please provide details of how the proposed administrative changes will affect you, including details of any one-off and ongoing costs or savings.
Questions 6.2: Do these administration proposals have a significant or disproportionate impact on groups with legally protected characteristics, as recognised in the Equalities Act 2010?
The consultation will run for 12 weeks from 15 August 2016 to 7 November 2016.
Summary of consultation questions: MTD Tax administration
- Question 2.1: Do you agree that compliance legislation should be amended to replicate current enquiry powers into the Self Assessment return to the End of Year declaration?
- Question 2.2: Do you agree that current HMRC and customer safeguards should also be maintained?
- Question 2.3: Are there any other options for preserving HMRC’s current enquiry powers in MTD?
- Question 2.4: Do you agree with the proposed approach to replicate HMRC’s compliance powers for determinations, corrections, information powers and discovery assessments?
- Question 2.5: Do you have any other comments on how compliance powers need to change to transition to MTD?
- Question 3.1: Do you agree that 12 months is an appropriate length of time to allow customers to become familiar with the new obligations before the new penalty regime comes into effect?
- Question 3.2: Do you agree that the period to wipe the slate clean should be 24 months? If not, what other period would be appropriate?
- Question 3.3: We invite views on the design principles outlined for the points-based penalty. For example, do you consider there are any further elements to build in to this basic model?
- Question 3.4: At what stage for each of these different submission frequencies should points generate a penalty?
- Question 3.5: We would welcome comments on whether existing penalties are sufficient to support compliance with occasional filing obligations. If not, what more is needed?
- Question 3.6: Do you agree that, in principle, a single points total that covers all of the customer’s submission obligations is the right approach? Question 3.7: Do you agree that the proposal outlined in paragraphs 3.25 to 3.28 is the right way to operate a single points total? If not, what alternative would you suggest that ensures the design of the penalty is kept simple?
- Question 3.8: We welcome views on whether the escalator model would be a more effective way of aligning with the five principles described in paragraph 3.2?
- Question 3.9: Do you agree that a fixed amount penalty is appropriate?
- Question 3.10: Should the amount of fixed penalty reflect the size of a business?
- Question 3.11: Do you agree that points should only become appealable when they have caused a penalty to be charged?
- Chapter 4 Question 4.1: Do you agree that 14 days is an appropriate length of time to allow customers to either pay in full, or make arrangements to do so before penalty interest is charged?
- Question 4.2: Do you think that charging penalty interest is the right sanction for noncompliance with payment obligations?
- Question 4.3: Are there other commercial models that might be appropriate for us to consider?
- Question 4.4: We invite views on the design principles outlined for penalty interest. For example, do you consider there are any further elements to build into this proposal?
- Question 4.5: Does model 1 or model 2 best meet the government’s objective of providing a fair and proportionate response to late payment of tax?
- Question 4.6: Do you agree that the timing of late payment penalties should change to reflect the frequency of payment due dates?
- Question 4.7: We invite views on the design principles outlined for late payment sanctions. For example, do you consider there are any further elements to build into these proposals?
- Question: 4.8: Which proposal best meets the design principles?
- Question 5.1: Should the current interest rules for Income Tax and Class 4 National Insurance contributions continue to apply in MTD?
- Question 5.2: Do you have any initial comments about aligning interest rules across taxes?
- Question 6.1: Please provide details of how the proposed administrative changes will affect you, including details of any one-off and ongoing costs or savings.
- Questions 6.2: Do these administration proposals have a significant or disproportionate impact on groups with legally protected characteristics, as recognised in the Equalities Act 2010?
HMRC would like to hear from organisations or individuals on the points raised. Responses should be sent by 7 November 2016, by e-mail to
Links
Consultation document: Making Tax Digital: Tax adminstration
For our summaries of the other Making Tax Digital documents see: Making Tax Digital: index