Making Tax Digital: Penalties for non-compliance
The Making Tax Digital requirements will be ignored by taxpayers unless there are sanctions for non-compliance. Rebecca Cave looks at the proposed MTD penalty regime, which also covers late payment and interest.
To make Making Tax Digital (MTD) work, the tax system needs to be simplified. HMRC has tinkered around the edges for income tax records by introducing the cash basis for traders, and a different cash basis for landlords (not so simple then!). VAT has had the simple flat rate scheme for small businesses complexified by the limited cost trader rules. But the real challenges for automation of tax compliance are posed by the various systems of penalties for late submission and late payment, which are currently different for each tax.
The payment date for VAT is not due to change with the introduction of MTD for VAT, and HMRC has said that it is not proposing to change the payment dates for other taxes.
VAT out of line
The surcharge penalty system for VAT applies for both late payment and late filing and can result in huge penalties for VAT payments which are only one day late, as Neil Warren explained.
In a consultation, HMRC has proposed to:
- align the VAT rules for late payment interest and repayment interest, with those which apply for income tax and corporation tax; and
- introduce a new model of late payments penalties, which could be rolled out to all taxes in due course.
Late payment reform
In 2009 the rules for interest and penalties for late payment were redrawn for all taxes, but the revised rules were not introduced for corporation tax or for VAT. The current proposals for penalties and interest for late paid VAT pretty much mirror the 2009 proposals.
The VAT default surcharge would be replaced by interest charged on the late-paid tax from the day it was due to the day of payment, so the interest charged would be in proportion to the degree of lateness.
In addition, if the VAT was paid more than 15 days late, a 2.5% penalty would apply. Where the tax was still outstanding after 30 days a 5% penalty would apply. If the taxpayer has a reasonable excuse for the late payment or has made a time to pay (TTP) agreement with HMRC within the first 15 days, the penalty will not apply.
However, if the TTP is not made until 16 days after the due date the 2.5% penalty would apply. The CIOT has pointed out that 15 days is not long enough to reach a TTP agreement in many cases.
Late filing penalties
Back in March 2017, HMRC consulted on penalties for late submission of MTD reports. It presented three alternative models:
- points given for each failure
- regular review of compliance
- suspension of penalties
In December 2017, HMRC announced that it was to take forward the penalty points system, which it said will work as a coherent package with the interest and penalties for late payment as described above.
Points mean penalties
The taxpayer will gather points every time they are late submitting an MTD report. As there will be separate MTD reports for each tax, there will be separate points awarded for each tax.
A taxpayer who has several businesses, for example a trade and a lettings business, will have to submit separate MTD reports for each business and for each tax. Thus, a sole trader will potentially gather more late submission points for their multiple businesses, than a company which can contain more than one trade, reported on a single corporate tax return. We don’t yet know how frequently a company will have to submit MTD reports.
Once a points threshold is reached, a financial penalty is applied. For quarterly MTD reports this is expected to be at four points, equivalent to a full year of quarterly reports. If the taxpayer has perfect compliance for a set number of MTD submissions, their points total is reset to zero. For quarterly submissions, four submissions delivered on time will reset the penalty clock to zero, if all MTD submissions for the previous 24 months have also been received.
Points will also generally expire after 24 months. The taxpayer will be able to appeal against both points and penalties.
Although MTD for VAT will start for VAT periods beginning on and after 1 April 2019, the new model of penalty points for late VAT returns will not be applied until 2020. It is not clear whether the current VAT surcharge system will apply to VAT returns submitted under MTD within that “soft landing” period of 2019/20.
There is a lot more detail to be worked out with the proposed penalty points system, including the financial level of the penalties to be applied.
This detail will be set out in the draft law and regulations which are due to be released for further consultation later this year.