HMRC have published a response to their consultation 'Making Tax Digital – sanctions for late submission and late payment', which includes details of the new points-based penalty system for late returns.
The consultation proposed a new late payment and submission penalty framework which would be applied across all taxes.
Late submission penalties
In the consultation, HMRC presented three options for a penalty approach that would replace the current rules.
- Model A: Points-based penalty.
- Model B: Regular review of the compliance model.
- Model C: Suspension.
It was interesting to note that both the Chartered Institute of Taxation (CIOT) and Association of Tax Technicians (ATT) preferred model C, though HMRC’s response states that the large majority, including the Institute of Chartered Accountants in England and Wales (ICAEW), supported a points-based system, model A.
The response document confirms that they will proceed with model A and the response document included a more detailed account of how the points-based penalty model is proposed to operate.
- A point is received every time there is a late return submission.
- At a certain threshold, a penalty is charged.
- Every late submission thereafter also incurs a penalty.
- The points are reset to zero after a period of good compliance i.e. timely submissions.
HMRC intends to proceed with the following penalty thresholds:
|
Submission frequency |
Penalty threshold |
|
Annual |
2 points |
|
Quarterly |
4 points |
|
Monthly |
5 points |
It is suggested that these would apply per tax for simplicity. In addition, where a taxpayer has more than one business, HMRC will allow them to have a points threshold for each business when it comes to MTD submissions.
HMRC propose the following periods of good compliance, which would be required to reset the points:
|
Submission frequency |
Good compliance period |
|
Annual |
2 submissions |
|
Quarterly |
4 submissions |
|
Monthly |
6 submissions |
Points will only be able to be reset if all submissions due in the previous 24 months have been made.
In addition, points will have a maximum lifetime of 24 months, except for where the points threshold is already reached.
Relief for Reasonable excuse will be available and the points and the penalties will be appealable.
It is expected that the new rules will be implemented alongside the start of Making Tax Digital (MTD) for VAT in 2020, with a 12-month soft-landing. It will, over time, be rolled out to as many taxes as appropriate.
Late payment penalty interest
The consultation proposed to replace the existing systems of late payment penalties and surcharges. Instead, it was proposed to use an interest-based calculation which would depend on the lateness of the payment. Little was said in the response document, although HMRC have now published a further consultation, Making Tax Digital: Interest harmonisation and sanctions for late payment, specifically dealing with late payments: both interest and penalties.
Interest will be straightforward, with calculations based on the due date and the date paid and will be linked to the Bank of England base rate.
Late payment penalties will have two parts to it:
- A 5% penalty will arise after 30 days.
- Where action is taken within 15 days, the penalty may be removed. If action is taken between 16 and 30 days, the penalty will be halved.
- After 30 days an interest type calculation will apply and additional penalties will accrue.
- The rate will not be linked to the Bank of England base rate.
- There will be relief for a reasonable excuse and time to pay arrangements.
The full consultation response document can be found here.
Links
Consultation: Making Tax Digital sanctions for late submission and late payment
Undecided! Responses compared to HMRC's MTD penalty condoc
MTD: Late payment penalties further consultation
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