New points-based penalties for late returns

John Flood examines the proposals in Finance Bill 2018-2019 for a points-based penalty system for late tax returns, which will also cover submissions made under MTD.

Rebecca Cave summarised the main proposals in the draft Finance bill 2018-19 including some important changes for penalties, which are now examined in more detail.

Points mean penalties

A points-based system for late filing of self-assessment returns and other periodic tax returns will be introduced. A fixed financial penalty will only be charged if a specified number of points are incurred over time because of defaults. The amount of the fixed penalty has not been announced.

HMRC says: “this measure will reduce the number of ITSA penalties issued, as a monetary penalty will not be charged from the start. The fixed penalty is likely to be set at a higher rate than current penalties to reflect this, but unlike the current penalty regime there will be no escalation to daily or tax-geared penalties.”

Which returns?

Initially, the new regime will only apply to income tax self assessment returns and VAT returns. It is intended to extend the provisions to the other taxes and duties over time. Corporation tax is not currently included in the new regime, but it is the government’s intention to apply the new approach to corporation tax in the near future.

HM Treasury is given the usual powers to extend the new system by way of ancillary and consequential amendments.

HMRC says: “The new points-based penalty regime will only apply to returns (including Making Tax Digital regular updates) with a regular filing frequency, for example monthly, quarterly or annually. It will not apply to occasional returns (for example a return required for a one-off transaction), which will continue to be covered by current penalty regime for the relevant return.”

No penalties for occasional mistakes

The idea behind the new scheme is to avoid penalties for one-off bona fide errors. Points for errors accumulate over time and it is only when they reach a pre-determined limit that a penalty can be imposed if there is a subsequent default. The points limit varies according to the nature of the return being considered, as shown in table 1:

Table 1

Two year life span

To avoid points simply accumulating over time there will be a two-year lifetime for points, after which they will expire and only fresh misconduct will result in points being awarded. If the taxpayer is at the penalty threshold then the points will not be automatically reset.

There must be a period of good compliance before the points can be removed. Good conduct means that returns must be filed on time and all relevant returns due within in the preceding 24 months’ returns have to have been submitted. Provisions will also be made for a change in the number of points required before a penalty can be imposed if the frequency of a return changes, such as a move from quarterly to monthly VAT returns. The idea is that a taxpayer and HMRC will neither be advantaged nor disadvantaged by the change that has occurred.

Notify taxpayer

The time limits for notifying the taxpayer of points are shown in table 2.

Table 2

Reasonable excuse

As with existing penalty provisions, there will be a reasonable excuse provision for defaults. This will be able to be given by HMRC on their own initiative eg when HMRC computers collapse or third-party software causes difficulty.

Additionally, the taxpayer will be able to seek a review of the decision to impose points or a penalty and, if necessary, exercise a right of appeal to the FTT. Importantly, HMRC will also be able to provide a period of transition or grace where points are not imposed on the taxpayer.

Concealment by failing to make a return

Schedule 12 to the draft Finance Bill 2018-2019 presents changes necessary for a consistent penalty regime in cases where the taxpayer has attempted to conceal information from HMRC by failing to make a return. If the concealment was deliberate, then the penalty is the greater of £300 or the relevant percentage of the tax that would have been due (see table 3).

If the omission was deliberate but there was no attempt at concealment, then the penalty is the greater of £300 or a percentage of the tax due, which will be less than the former situation.

As now, the relevant percentages vary depending on the nature of tax obligation involved and what country the tax obligation relates to. Countries are sorted into categories, with category 0 being domestic UK tax obligations and categories 1 to 3 referring to different lists of overseas jurisdictions classified according to the perceived risks to revenue they involve, and the degree of cooperation between the UK and the specific country.

Table 3

As currently the penalty percentages may be reduced further according to the degree of disclosure and co-operation with HMRC by the taxpayer or his agent. All penalties may be the subject of a review or appeal.