The Chartered Institute of Taxation (CIOT) has called on HMRC to allow taxpayers a limited number of defaults before incurring a penalty for late submissions under the new proposals for digital tax reporting.1 This can be achieved by allowing those taxpayers a short extension period on those particular occasions.2
The CIOT says such an approach to penalties is more consistent with HMRC’s five principles for penalties than alternative penalty regimes that HMRC recently consulted on.3 The CIOT has said that this ‘cumulative suspension’ penalty regime is more likely to encourage compliance, penalise non-compliance and be a proportionate response to late filing.4
HMRC is yet to publish details about the level of the penalties, although it has confirmed that this will be a fixed penalty, irrespective of the size of the business.
Adrian Rudd, CIOT spokesperson on MTD, said:
“The Making Tax Digital project will present significant technological and logistical challenges to the many small businesses and landlords which are not currently maintaining digital records or interacting with HMRC on a frequent basis. It is important that the penalty sanctions for the new regime reflect this, particularly in the early years.
“The suspension model most closely complies with HMRC’s penalty principles, which include that penalty regimes should be designed from the taxpayers’ perspective, primarily to encourage compliance and prevent non-compliance, and that penalties are not to be applied or seen to apply with the aim of raising money.”
In its submission to HMRC, the CIOT recommends that penalties are visible to taxpayers (and their agents) and must not accumulate without the taxpayer becoming aware of them. The tax body also said that penalties must be kept simple, so that they and the policy intention behind them are easily understandable to the ordinary taxpayer, and there must be a straightforward right of appeal against the imposition of a penalty.
Adrian Rudd added:
“There is a heightened risk that people with several forms of income will regularly face fines for lateness once the amnesty period is over. Take the example of a taxpayer who is VAT registered, has a trade and has a buy-to-let property. They may have to get used to meeting up to 15 MTD deadlines year, over and above their existing obligations under Real Time Information etc.”
Because of the significant increase in reporting obligations, the CIOT argues that the penalty amnesty for MTD should be similar to the three-year penalty amnesty for the smallest businesses when Real Time Information (RTI) was launched in 2013. Under RTI, employers and pension providers send HMRC information each time they pay their employees.
Notes for editors
1. 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 2018. Penalties will apply for late End Of Year (i.e. annual) filing obligations as well as quarterly updates.
2. The penalty model favoured by CIOT in its submission (here) is one of three suggested by HMRC. This model gives the customer the opportunity to avoid having to pay a penalty by providing a late submission. When the first failure happens the customer would receive a notice advising them that they did not provide the submission on time and are liable to a penalty, but HMRC would not charge it on condition that they provide the outstanding submission within a specified time.
If the condition was not met the penalty would be charged. If the customer is late a second time they could again be notified of their failure and given the opportunity to escape being charged a penalty in return for providing the outstanding submission within a specified time.
The number of occasions on which a penalty would be suspended would need to be limited.
After a period of sustained good compliance, penalties again should be suspended for initial failures before suspension is no longer available.
For more details see here.
3. In 2015, HMRC set out the five broad principles that HMRC consider should underpin any new penalty regime now that it is moving to a digitised tax system. See page three in HMRC document here.
4. The CIOT has suggested an approach to make the suspension model more closely comply with those five penalty principles, in its submission
Quarterly submissions – a missed deadline attracts a suspension with conditions to file the update by a specified date. If the taxpayer meets the conditions, they are put on 12 month ‘probation’ but with one further suspension opportunity in that period. If they miss one further deadline within the 12 month probation period and meet the suspension conditions they will not get a penalty but the 12 month probation period recommences and they will have to submit the next four updates on time to avoid an automatic penalty and to re-set the clock.
The first time that a taxpayer misses the suspension conditions they do not get a penalty, but are put on 12 months’ ‘probation’ without any further suspension opportunity. If they miss a further deadline within the 12 months they will get an automatic penalty. They need four consecutive submissions on time to re-set the clock. If not, they will continue to get an automatic penalty every time they miss a deadline.
Annual submissions – as above, but the ‘probation’ period is two years and so the taxpayer needs to file two consecutive submissions on time to re-set the clock.
5. Among general suggestions on MTD penalties made to HMRC by the CIOT in its submission:
· Different filing obligations should be kept separate for penalty purposes, as if they were separate taxes. This will help taxpayers with multiple MTD filings within a particular tax, e.g. someone who has one or more self-employed business and or let property
· Taxpayers should be given a minimum period of 12 months on a ‘tax by tax’ basis from when they become subject to MTD obligations before penalties are applied . This will help when different filing dates or requirements apply for different taxes, for instance VAT obligations and income tax obligations
· The ability to claim a reasonable excuse for failing to meet a filing obligation should be maintained
· The facility for taxpayers to alert HMRC before the filing deadline that they are going to fail to meet the deadline, as is possible with Self-Assessment and have a reasonable excuse for that failure, should be considered
· Penalties must always be subject to a right of appeal. There must be a visible, clear and easily accessible right of appeal against the imposition of a penalty
· Agents must be able to see their clients’ compliance history, and be able to appeal against penalties and penalty points issue to them
6. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
Contact: Hamant Verma, External Relations Officer, 0207 340 2702 HVerma@ciot.org.uk (Out of hours contact: George Crozier, 07740 477 374)
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