MTD penalty responses send HMRC mixed signals
The lack of unanimity in accountancy bodies’ responses to the Making Tax Digital late submission penalty consultation paper suggests this could be a difficult circle to square for the Revenue.
One of the stated aims of Making Tax Digital (MTD) is to make it easier for individuals and businesses to get their tax right, and the government sees a new penalty regime as a key plank in helping businesses adopt the regime without feeling punished for making honest mistakes.
After its initial proposals for late submissions and payment sanctions under MTD received a somewhat frosty response, it was felt that more work was needed to get the penalty model right.
- Model A: a revised version of the points-based model proposed in the last consultation, where a penalty would be charged when a certain points threshold is reached (similar to driving offence points).
- Model B: a regular, automated review over a set period of time with points being given subject to compliance history.
- Model C: Suspensions of penalties – the taxpayer can avoid a penalty if they provide the late submission within a specified time.
The consultation closed this month, but with different accountancy bodies coming out to back a range of different options, no clear consensus has emerged, making it difficult to see which way the tax authority will go.
The Chartered Institute of Taxation (CIOT) called on HMRC to adopt Model C, allowing taxpayers a limited number of defaults before incurring a penalty for late submission.
Adrian Rudd, CIOT spokesperson on MTD, said: “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.”
Of the three possible penalty models proposed, the ICAEW recommended model A, the points-based system, which also includes the option for penalties to be suspended.
In a statement, the ICAEW said: “We consider that the points-based system is the right starting point but that an element of suspension should be built into the model. Analogies with the system for points on driving licences have been drawn but what is lacking in the points-based model for submission penalties is a sufficiently strong warning and an education element (e.g. the equivalent to a course instead of points).
“The extent to which taxpayers will not understand their obligations in the early years of MTD (and in the early years of trading if the business commences once MTD is operational) is, we believe, being underestimated. Allowing for suspension once a penalty is charged, subject to a condition that the submission is made within a certain period, would promote compliance.”
ICAS backed a mixed approach, supporting a combination of models A and C. A response document from the Scottish Institute stated that Model A had “significant advantages”, was easy to understand and the ability to reset the penalty clock to zero after a period of compliance was an incentive to address compliance failures.
However, the Scottish Institute went on to say that the use of suspended penalties can also be an effective motivation and compliance tool which should be used more widely – an attractive part of Model C – but the model’s all or nothing aspect and lack of build-up rendered it less effective.
“Combining models A and C would result in an effective compliance model,” concluded the response document. “This would also take into account the different needs and motivations of different taxpayers and sizes of business.”
The new consultation paper also confirmed HMRC would continue to explore penalty interest as a sanction for late payment of tax.
Reacting to this Mike Down from accounting firm RSM stated that there is scope for charging penalty interest as well as interest on late paid tax.
However, if the tax authority proceeded with this the rate of penalty interest “should be set at a fixed rate that increases in line with the length of the continuing failure to pay – and certainly no penalty interest should be imposed before a 30 day period had passed.”
Which of the following penalty regimes do you think should be introduced? And which do you think is likely to be implemented?