The Chartered Institute of Taxation (CIOT) is pleased that its concerns about the fairness of penalties for filing late under Making Tax Digital (MTD) will be addressed by HMRC, particularly that penalty points will have a ‘shelf life’ and will therefore expire after a period of good compliance.
Other CIOT recommendations that HMRC have said they will consider before implementing the new regime include that submission of already late returns will be incentivised, making penalty points as well as actual penalties appealable, maintaining the taxpayer’s ability to claim a reasonable excuse for failing to meet a filing obligation and that penalties should apply on a tax by tax basis.1
John Cullinane, Tax Policy Director at CIOT, said:
“It is encouraging that HMRC have taken on board many of our concerns about the points-based model. 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.
“It is going to be essential that points are clearly visible so that individual taxpayers are aware of how many points they have accrued, how they can avoid accumulating further points and when they are approaching the stage of incurring an actual financial penalty. 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.
“We agree that both points and actual monetary penalties must be appealable, but 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.”
In its response to a recent consultation, HMRC have confirmed that the penalty system for late submissions under MTD will be a points-based model. Draft legislation will be published in summer 2018. It is anticipated that the model will first be implemented for VAT in 2020, to allow for taxpayers within MTD for VAT a period of 12 months to become familiar with their new obligations after they first become subject to MTD in April 2019.2
The penalty regime favoured by CIOT in its submission was the alternative ‘penalty suspension model’, one of three suggested by HMRC. This model would have given the taxpayer the opportunity to avoid having to pay a penalty by providing a late submission. However, the Institute is pleased that many of its suggestions have been taken on board with the chosen version.
Notes for editors
1. HMRC’s response to the consultation can be viewed here - Making Tax Digital – sanctions for late submission and late payment Summary of responses December 2017.
The CIOT’s submission to the original consultation can be viewed here.
Among general suggestions on MTD penalties made to HMRC by the CIOT in its submission which HMRC have indicated that they will address in the points-based model:
- Setting out the periods of good compliance for the purposes of resetting points totals to zero.
- Incentivising submission of information once the deadline has passed.
- Making points as well as actual penalties appealable.
- Maintaining the ability to claim a reasonable excuse for failing to meet a filing obligation.
- Providing a facility for taxpayers to alert HMRC before the filing deadline that they are going to fail to meet the deadline, and have a reasonable excuse for that failure.
2. For more information about the dates and the rollout of MTD see link here. The introduction of digital record keeping and quarterly updates for the majority of businesses, self-employed people and landlords will reduce mistakes, according to HMRC. The changes are being introduced gradually, starting in 2019. Penalties will apply for late End of Year (i.e. annual) filing obligations as well as quarterly updates.