HMRC wants to help businesses get their tax right first time and prevent them feeling punished for making mistakes.
The penalty model will follow 5 principles that HMRC have defined as:
- It should be designed from the tax payer perspective, not to generate revenue
- Penalties should be proportionate to the offence
- Penalties must be applied fairly
- Penalties must provide a credible threat
- Penalties should be consistent and follow a standardised approach
This will ensure a penalty model that is fair, effective in supporting good compliance and simple to understand and operate.
A 12 month soft landing has already been confirmed and this will give all within scope for MTD time to become familiar with the new obligations before late submission penalties come into effect. Initially, there will be a separate penalty model for each tax regime but eventually HMRC aim to introduce a single penalty scheme across them all. Just like Self-Assessment today, all the models will only apply where a tax payer has failed to meet an obligation and does not have a “reasonable excuse” for doing so.
Consultation on late filing penalties sets out 3 possible models for the penalty schemes
Model A: Points:
- This is a revision of the points system in the original MTD consultations as it now applies per tax, rather than across all taxes.
- A tax payer will receive a point each time they fail to provide a submission on time. When the points reach a certain threshold (4 in HMRC’s example) a penalty will be charged. The points will be reset to zero after a period of successful compliance (based on the number of “good” submissions; 2 for annual, 4 for quarterly and 6 for monthly).
Model B: Regular review of compliance:
- HMRC will carry out an automated regular review of the tax payer’s compliance with submission obligations over a set period (the period and frequency proposed is 1 year). If they have more than one failure during the set period a penalty will be charged at the time of the review. HMRC have a couple of proposals regarding the timing of the review ranging from the end of the 4th quarter filing, to aligned with the end of the 1st quarter of the following period.
- This ties the penalty to a history of non-compliance, it allows for several failures to be subsumed into a single penalty and means the penalty may be charged sometime after the initial failure. The number of failures will also be factored in when calculating the penalty.
Model C: Suspension:
- HMRC would not charge a penalty immediately on first failure. Instead it would suspend the penalty on the condition of the tax payer making the submission within a specified time.
- This gives tax payers the ability to avoid the penalty by correcting their mistake and enables HMRC to discourage a pattern of late submission by imposing a limit to the number of late submissions allowed before a penalty will be enforced.
Tax payments and interest
It is important to note that right now, MTD makes no change to the timing of mandatory tax payments.
The 2016 consultations set out two proposals with regard to handling late payments and in the responses, many felt that late payment interest is a fairer penalty mechanism than a late payment penalty as it is proportional to the amount outstanding and the lateness of the payment.
Date from which penalty interest will be calculated
The 2016 consultations proposed that the interest be charged from 14 days after the payment is due but an overwhelming majority of respondents said the duration was too short as it could snare those away on holiday or suffering from an illness etc.so HMRC are now reconsidering this.
However, HMRCs current assumption is that penalty interest will still be payable from the day after the due date for the tax and will continue to run until the tax is paid in full.
The rate of interest
HMRC will set the interest rate at a higher level than commercial loans etc. to ensure that a debt owed to HMRC is not a lower priority than amounts owed to other creditors.
The 2016 consultations used 10% as an illustration and the responses (unsurprisingly) suggested that this was too high. In the case of late payment of commercial debts ‘state interest’ can be charged, which is 8% plus the Bank of England base rate for business to business transactions. This is now a strong contender for the HMRC rate.
HMRC are proposing that penalty interest will be charged in addition to late payment interest and that this will ultimately replace default surcharges and all late payment penalties.
HMRC have also stated that there will be a further consultation on penalty interest.
How to respond to the consultation:
The consultation is 24 pages long. There are 11 questions within the consultation and to provide your responses you must email them to MTDTA@hmrc.gsi.gov.uk by 11 June 2017 or send via post to:
Making Tax Digital Tax Administration
100 Parliament Street
The full consultation can be found here: