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Man waiting on water | AccountingWEB | Draft legislation to toughen up late payment penalties
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Draft legislation to toughen up late payment penalties

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Amy Chin looks at the launch of a new consultation designed to help update payment penalty rules.

21st May 2024
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HMRC has launched a consultation to garner feedback from taxpayers, agents and professional bodies on the draft legislation: Penalties for Failure to Pay Tax (Schedule 26 to the Finance Act 2021) (Assessments) Regulations 2024. This will update the new late payment penalty rules set out in Finance Act 2021, Sch 26.

As explained in my previous article, anyone who volunteers to sign up for the Making Tax Digital for Income Tax (MTD IT) private beta will be subject to the new late submission and payment penalty rules from 6 April 2024.

The reformed penalty system for VAT came into force from 1 January 2023. For taxpayers who have not signed up to the MTD IT testing programme in 2024-25, a new penalties regime is proposed to coincide with the roll-out of MTD IT (currently planned for April 2026).

Levelling the playing field

Under the reformed late-payment penalty regime, a customer can receive two late-payment penalties. The second penalty, which is the focus of this consultation, is charged on a daily basis at a rate of 4% per annum from day 30 until the tax is paid in full.

Para 18 of Sch 26 essentially allows HMRC to assess the second late-payment penalty once, within a two-year assessment time limit, only when the outstanding tax is paid in full.

The two-year time limit gives customers certainty about when penalties are charged but the current rules also give taxpayers who have filed their return, but not paid the tax, an incentive to delay payment until after the two-year time limit has elapsed, leaving HMRC out of time to levy the second penalty at all.

The proposed changes aim to create fairness between taxpayers who pay their tax and those who do not.

Second penalty

Regulation 2 of the draft legislation will enable HMRC to levy a second penalty seven days before the end of the two-year period if the tax has not been paid in full and there is no time to pay arrangement in effect. This will mean taxpayers will not be able to intentionally avoid a second late-payment penalty by not paying their outstanding tax before the end of the two-year time limit.

However, what the draft update does not appear to fix is that no further second penalty will then accrue past the two-year point. Whether the tax is paid two years late or four years late, the second penalty would be the same, although interest would continue to accrue.

ATT technical officer Emma Rawson told AccountingWEB: "This seems a very sensible move to fix a loophole which could have otherwise been exploited. It’s in nobody’s interest for taxpayers to deliberately delay tax payments for years in order to escape financial penalties.

“These new penalties have been in place since January last year for VAT, but will be rolled out to more taxpayers as MTD ITSA expands.  It’s therefore reassuring to see HMRC taking steps to fix problems at this stage."

All-time low

That said, this tightening up of the penalties regime comes at a time when HMRC's service levels are at an all-time low, with HMRC's valued 'customers' and their agents facing a near-impossible challenge to get through to any of the department's support services.

This, alongside recent errors within HMRC's systems and guidance, greatly increases the chances of taxpayers missing the payment deadlines because they disagree with amounts calculated by HMRC and are unable to get through to anyone to resolve the issue.

Glenn Collins, head of technical and strategic engagement and the ACCA, shared some gloomy statistics from the professional body's recent member surveys.

In March 2024, 66% (up from 52% in the Autumn survey) of respondents said that poor HMRC services were having a negative impact on the productivity of individuals and businesses. Just 2% said that the impact was positive.

A worrying theme in many of the comments left by respondents to the ACCA survey suggests that many taxpayers are employing a new tactic of waiting until their debt is referred to a debt collection agency.

Once this happens, the taxpayer can phone the agency who will answer immediately, deal with HMRC on the taxpayer's behalf and get the problem resolved efficiently, saving the taxpayer hours of trying to get through to HMRC's beleaguered helplines or seemingly unmanned webchat.

Collins added: "I’m sure they charge HMRC for this and the agent I spoke to said an increasing number of taxpayers are going this route!"

Have your say

An HMRC spokesperson said: “We’ve begun a technical consultation which will ensure that the reformed penalty regime for late payment of tax works as intended.

“The regulations are technical in nature and introduce a minor change.”

HMRC is welcoming views from tax and accounting bodies and taxpayers until the consultation closes at 11:59pm on 10 June 2024. Comments can be emailed to [email protected] before that deadline.

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Replies (3)

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By FactChecker
21st May 2024 18:44

It seemed obvious to me before reading the detail, and nothing has changed my opinion now that I've read it all, that the current state of HMRC (inaccessible / unresponsive / error-prone / in short dysfunctional) means that this consultation is looking in the wrong direction - akin to staring down the wrong end of a telescope.

The effort/resources/costs expended (by both HMRC and taxpayers) in fighting off inappropriately issued penalties - let alone resolving them in a timescale commensurate with both effort & value - wholly dwarfs the benefits obtained via the penalty regime (old or new variants).

Although I dislike the label of 'complaints handling', any private sector business that was remotely interested in customer retention/satisfaction would make *that* the highest priority ... safe in the certainty that doing that well would deliver improved penalty receipts (because they're correctly targeted) whilst using fewer resources.
In other words ... the exact opposite approach to that being taken!

Thanks (6)
By cfield
22nd May 2024 14:15

From our ringside seats watching the meltdown of HMRC, it is hard not to draw parallels with all the other national scandals that have become all too familiar. Yesterday we saw the Prime Minister having to apologise for the NHS blood scandal and promise billions in compensation. Today we see the ex-CEO of the Post Office saying she didn't even know the prosecutions were private and that everyone kept her in the dark. This comes on top of Windrush, Grenfell, Hillsborough, Party Gate, MPs expenses, PPI and others too numerous to mention.

It seems to me there must be a common thread running through all these and that nothing will ever change until that root cause is identified and addressed. Is it simply that the people running this country are just totally useless? If so, how do they get these top jobs? Surely there must be enough sensible men and women about for these scandals never to have happened if they'd been in charge.

Or is to to do more with our culture, legal framework, whatever, and that the people in charge never really stood much chance of changing or preventing anything anyway? In that case, we have a root and branch job on our hands, if we're ever allowed to do it, which is highly unlikely bar a Year Zero.

The only redeeming feature is that at least we live in a country where these scandals do eventually come to light. Thank goodness for social media and the freedom of the press.

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Replying to cfield:
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By johnjenkins
22nd May 2024 14:52

You're not the only one saying this. Nigel Farage, Jacob Rees Mog et al.
Perhaps it's all coming on top now. Let's hope so.

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