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MTD penalty responses send HMRC mixed signals

4th Jul 2017
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Handcuff and tax
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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.

In a new consultation, the government set out three possible models to penalise late payments and submissions with a plan to implement one:

  • 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.”

Penalty interest

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?

Replies (38)

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By SteLacca
05th Jul 2017 09:28

I like the points similar to driving penalty points, but would like to see an automatic ban from MTD after a certain number of points has been reached.

Thanks (17)
Replying to SteLacca:
By djn24
05th Jul 2017 09:52

SteLacca wrote:

I like the points similar to driving penalty points, but would like to see an automatic ban from MTD after a certain number of points has been reached.

Ha ha, that's brilliant :-)

Thanks (2)
Replying to SteLacca:
Tornado
By Tornado
05th Jul 2017 10:02

A lovely idea.

I can never see the point in fining people if they are simply unable to comply with unreasonable rules. The fines will not make them any better at what they are supposed to be doing.

We should be discussing the practicality of the rules rather than the extent of the penalties and why are we discussing penalties when there is no enabling legislation in place for the rules anyway?

Thanks (8)
Replying to SteLacca:
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By David Winch
05th Jul 2017 17:25

So if they're banned, how do they file their tax returns? On paper as now?

How do I join this scheme without the need to incur penalty points first?

David Winch
Sales & Marketing Consultant, Cambridge

Thanks (1)
Replying to David Winch:
Tornado
By Tornado
05th Jul 2017 18:17

"So if they're banned, how do they file their tax returns"

HMRC don't need the full Tax Return print-out, so comma separated data written on some vellum would be ideal.

There are many modern ways to get the vellum to HMRC such as -

a) Carrier pigeon
b) Owl Mail
c) Driverless car
d) Driverless Amazon drone
e) Send your servant
f) Driverless Amazon robot
g) Particle dis-assembly (beam me up Scotty)
h) Wish the information to HMRC. (much like their own approach to MTD : Wishful Thinking)
i) Attach to a paper plane.

(Anyone who accuses me of not taking the results of the Penalty Consultation seriously ...,... would be perfectly correct .......... for obvious reasons)

Thanks (3)
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By Eric T
05th Jul 2017 09:45

Hee hee - being banned from MTD would be something many might aim for.

Thanks (4)
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By andrew1211
05th Jul 2017 10:02

Penalties and MTD should not be talked about in the same breath until such time as the systems have been properly tested and tried, and a few years have passed until things are bedded in...typically wrong HMRC priorities

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Replying to andrew1211:
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By Michael C Feltham
05th Jul 2017 10:08

HMRC, Treasury and Government rather give the game away here, Andrew.

The whole sorry charade was only and is only all about Government desperation to somehow increase tax revenues in the vain endeavour of struggling to deal with an ever-increasing fiscal deficit whilst the real economy on Main Street, is on its knees.

Thanks (3)
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By tiercel55
05th Jul 2017 10:42

This MTD nonsense needs to be stopped. It will cause chaos. There will no benefit to anybody - the government will not gain extra revenue - more than likely they will lose revenue - people falling out of the system and going back into the black economy- the extra accountancy costs will reduce net profits and hence tax take will fall . The self employed will incur substantial extra costs for absolutely no benefit. I predict if this goes it ahead it will end up a complete shambles. The individuals concerned with its possible implementation have absolutely no idea of what is happening in the real world. At the moment I have not found one client who is aware of what HMRC is proposing and needless to say when I tell them their reaction is not printable.

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By Agutter Accounts
05th Jul 2017 10:45

I deal with clients, mostly sole traders or one person companies, who have difficulty filing once a year, let alone quarterly.

If we have "driving penalty points" at 3 points a time, they'll be disqualified from MTD after the end of the first year. Cheers and celebrations will then be in order.

Life is hard enough for small business, and MTD may be a step too far. Some will go fully into the so-called "black" economy, and others will just give up.

Thanks (1)
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By KenKLM
05th Jul 2017 10:49

HMRC will spend enormous amounts of unproductive time imposing , reviewing , cancelling these penalties . Make it simple as possible because MTD is going to be enough of a mess and agents are not going to feel obliged to help clients out that have gone it alone .

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By Andrew Jackson
05th Jul 2017 10:54

I do think that modelling it on driving licence points is the best way - it's a model that people already understand.

If you're late, get X points. Those points expire after Y years. If you ever get over Z points, you get a penalty. Simples.

If HMRC design their own system, we'll have the same sort of problem as we have with Universal Credit - a reinvented wheel that does unexpected things and confuses people.

Thanks (1)
Replying to Andrew Jackson:
Tornado
By Tornado
05th Jul 2017 11:01

"a reinvented wheel that does unexpected things and confuses people."

Especially if it is square.

Thanks (1)
By 0098087
05th Jul 2017 10:58

the whole thing won't work. Clients don't want to know. Even ones who know what they are doing are making shocking mistakes in cloud based systems. Who has the time to deal with this pointless waste of time.

Thanks (4)
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By johnjenkins
05th Jul 2017 11:28

and what really is gobsmacking is that HMRC know our fears yet they still push for what will be the most monumental disaster in the history of HMRC.

Thanks (3)
Replying to johnjenkins:
Tornado
By Tornado
05th Jul 2017 15:59

Reading an article in the Mail recently made me think if a social disorder can be applied to a body (e.g.Government Department) as a whole (from Wikipedia) -

"Psychopathy, sometimes considered synonymous with sociopathy, is traditionally defined as a personality disorder characterized by persistent antisocial behavior, impaired empathy and remorse, and bold, disinhibited, egotistical traits"

Thanks (2)
Julie Stacey
By Pingsquitch
05th Jul 2017 12:27

I do like SteLacca's response but can't see that ever happening. Realistically, I think A is the best idea but to include a training course for the offenders.

Thanks (0)
Replying to Pingsquitch:
Tornado
By Tornado
05th Jul 2017 12:40

"but to include a training course for the offenders."

An interesting idea. The penalty will be cancelled if you agree to sit though 5 MTD webinars.

A sort of MTD Awareness Course.

Thanks (2)
Replying to Tornado:
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By Chris Mann
05th Jul 2017 13:42

"A sort of MTD Awareness Course".

Yes - another four hours of your life lost! While the course providers make millions!

Just about sums up the UK establishments philosophy, from what I can see.

Thanks (2)
Replying to Chris Mann:
Hallerud at Easter
By DJKL
05th Jul 2017 15:40

At least down south you have the possibility of such a course, up here no such mitigation allowed. (Much to my other half's disgust as she has just picked up three points whilst my licence has had the Persil treatment, despite a southern transgression, and is whiter than white)

Could just see MTD run in similar divided manner, Scottish Government continuing to believe that business is an irritant that gets in the way of effective tax gathering and taking no prisoners.

Thanks (1)
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By justsotax
05th Jul 2017 12:38

get it to work their end first....of course it was never about penalties when first mooted...but now they see 5 or 6 (depending upon which stories you believe) opportunities to penalise people for late submissions....I dare say this is the only way they will be able to show the tax gap is closed and therefore justify another waste of public money (although I guess HS2 will make this look like buttons).

Thanks (1)
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By C J EYRE
05th Jul 2017 15:35

If we are having a points system, then can we have it in both directions as I am still trying to get reply's to 2 letters I sent to the Revenue in December 2016 re errors they have made in respect of my clients affairs, both in respect of NIC adjustments they wrongly made to my clients submitted Tax Returns.

Thanks (1)
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By Mr J Andrews
05th Jul 2017 16:40

Typical - cart before the horse again.
We all know MTD is a load of b*llocks with the aim of squeezing extra monies out of small businesses by hook or by crook. How much longer does the pretence continue.
Tom Herbert has aptly summed up this latest so called ''consultation''............NO CLEAR CONSENSUS HAS EMERGED............ .No surprise there then.

Thanks (1)
Tornado
By Tornado
05th Jul 2017 20:40

At the moment I cannot see any time allocated in Parliament to debate a second Finance Bill 2017 before this session of Parliament closes on the 20th July 2017. Indeed, I have read a report that Theresa wanted to end this session early but has had to hang on to allow the King of Spain to address Parliament during his state visit next week.

The next session of Parliament starts on the 5th September 2017 so, although not impossible, it seems unlikely that a new 2017 Bill will see the light of day before then.

The fact is that a 2017 Finance Bill has already passed into legislation and it did not include any MTD content.

Thanks (0)
Replying to Tornado:
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By johnjenkins
06th Jul 2017 08:38

Does it really matter? The pilot is going ahead and once it is proved that the system is workable (albeit for those that want it) the law side of things will become academic. There is only one way to stop it and that is all business and agents not to use it. Quite how that will work and comply with tax obligations I'm not sure.

Thanks (1)
Replying to Tornado:
By SteLacca
06th Jul 2017 08:41
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Replying to SteLacca:
Tornado
By Tornado
06th Jul 2017 20:42
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By North East Accountant
06th Jul 2017 08:58

Will be interesting to see if HMRC apply penalties to errors as well as late filing.

The way MTD is set up at the minute any errors or adjustments affecting Quarter 1 are dealt with by filing an amended Quarter 1.

MTD Filings, assuming client dealing with quarters, will be;

Q1 to Q 4 original filing - by client
Q1 to Q4 amended filing - by agent sorting out mess
Year End Activity
Final Declaration

10 returns per annum!

To really make us accountants happy we will have to amend all transaction errors on the date of the transaction rather than as a year end journal.

This will quite nicely highlight to HMRC the errors made each quarter enabling them to issue penalties thereon.

Thanks (0)
By Democratus
06th Jul 2017 09:14

Part of the problem (a problem of HMRC's own making of course by coming up with MTD in the first place) is that the responses are from bodies representing professionals. Despite what people think of us as a whole we are capable of coping with MTD and ensuring, for the most part that clients will be compliant.

The true response's which HMRC should listen to, if in fact they actually really intend to listen to anyone with a contrary opinion, should be from those bodies representing the SMEs, small businesses, OMBs etc.

This is where the real stress points are. If HMRC really believe that the tax take can increase by increased compliance, how can they be of the opinion that additional compliance requirements with associated penalty scheme is the answer.

I dunno.....the world's going to hell in a handbasket and our leaders seem to have no idea anymore.

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By nicmgfi
06th Jul 2017 12:58

Having read the MTD comments over the last few weeks/months/blah and I've come to the conclusion that you are all a bunch of dinosaurs. HMRC is trying to move with the (technology) times and really, this is way overdue. Of course, HMRC involvement means that it will be complete chaos but having worked for Accenture on the NIRS2 , I know that these things have a habit of working out (eventually and at great cost) but technology marches on and you can decide to be either a leader or a moaner :-)

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Replying to nicmgfi:
By 0098087
06th Jul 2017 13:15

So who's going to pay for the 20 or 30 quid a month for cloud software. Or who's going to train the clients. Who has the time? Tell me? RTI isn't working. Auto enrolment is another waste of time that should have been done through PAYE. Why should people have to? It's all a money grab through HMRC and it'll be fines and penalties for people. This country's problem is we sit and take this crap. Just like austerity. The rich get richer and everyone sits and takes it. Govt only gets back in as they play on people's fears about immigrant etc. It's a disgrace and this is pointless, costly and not necessary.

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Replying to nicmgfi:
Tornado
By Tornado
07th Jul 2017 11:00

Speaking for myself, if you look back at some of my posts you will see that my firm was one of the first Accountants to use personal computers for Accounts production and word processing in 1981 (36 years ago). I had one of the first pocket sized mobile phones in 1989 and started communicating with my clients by email in the year 2000.

I do not consider myself a dinosaur, rather as someone who has some considerable experience in the progress of technology and how it can or cannot be of benefit. I do consider myself a leader but not the type that would lead my men into the Valley of Death

The vast majority of contributors to AccountingWeb see the benefits of a more digitally based tax administration system and are not against this. The main objections are to the lack of proper planning and the unnecessary speed at which MTD is trying to be introduced.

As Accountants we carefully advise our clients on the best way to progress their businesses with practical forward planning, something that HMRC obviously have little experience with. Indeed, your own comment -

"HMRC involvement means that it will be complete chaos but having worked for Accenture on the NIRS2 , I know that these things have a habit of working out (eventually and at great cost)"

- seems to suggest that progressing in a chaotic way is the norm and is OK.

It is not OK and definitely not a good way to progress with such a major project as MTD.

Change for sake of change does nothing to assist progress. Properly planned change taking into account ideals yet remaining pragmatic does bring real progress and I think that is all that most of us are looking for.

Thanks (1)
Replying to nicmgfi:
By SteLacca
06th Jul 2017 13:35

No-one has said that digitisation is a bad thing, and in fact it is almost universally accepted that it's about time.

The problem with MTD is not the idea, but the implementation, at least quadrupling work, with the potential to quadruple penalties, whilst making no use whatsoever of the information submitted.

Add to that introduction before the software is ready, the complete lack of information, detail or publicity, and the flawed assertion that this will increase the tax take, and you get to the root of the objections.

It's not that digitisation is wrong, it's that how HMRC are trying to do it is wrong.

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Replying to nicmgfi:
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By johnjenkins
06th Jul 2017 15:33

Totally agree with you nicmgfi ( I'm trying to work out what that stands for). However would you please explain to us Dinos how submitting 6 or more returns will actually make things easier than submitting one with all information init?

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By arthurallan
06th Jul 2017 13:59

Quite frankly they should ditch the whole stupid idea of MTD.

MTD achieves none of the stated objectives of making tax simpler, reducing errors, raising more money for HMRC and helping small business. All the figures and estimates are made up or plain bogus. Its chaos in the making .. yet again.

I have clients who are keen to embrace the modern online bookkeeping options but still manage to make a pig's ear of things on a fairly regular basis. Goodness knows how clients who don't want to embrace the new technology (the vast majority of my clients) will get on with it if they are given the opportunity!

I continue to email various MPs about this on a regular basis but such is the inertia at MP level that I haven't managed to elicit a single reply (not even from MPs I know personally quite well). Shows how interested they are.

Not sure what Corbyns position is on this but hopefully with the hung Parliament the whole idea will be put out to dry .. good weather for it down here!!

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By 0098087
06th Jul 2017 15:50

If clients are submiting in year ones then most will be wrong and the one we submit will be correcting. So what's the point?

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Replying to 0098087:
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By North East Accountant
07th Jul 2017 11:04

0098087 wrote:

If clients are submiting in year ones then most will be wrong and the one we submit will be correcting. So what's the point?

Best ask HMRC.

Of course, they'll give you a load of guff none of which is the real point.

The real point was buried on page 36 at 5.9 of one of the condocs in August 2016.

"HMRC will use the data in the updates to build a better understanding of each business. In turn this enables HMRC to more easily identify those businesses who deliberately do not comply with their tax obligations and to focus its efforts on them"

How this will identify those in the black economy who will ignore MTD is beyond me but at least HMRC can have a go at those who are in the system.

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Replying to North East Accountant:
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By johnjenkins
07th Jul 2017 11:49

HMRC must obviously be talking about business that do not have agents.
Now if all business that didn't have agents had to submit quarterly figures I could actually see a point. Otherwise HMRC are saying that business and agents are in collusion to deliberately not comply. If that is the case then submitting quarterly figures still won't stop it.
I do not understand how our bodies have allowed HMRC to get away with even thinking about submitting quarterly figures for the small business.

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