New points-based penalties for late returns

tax return 2018
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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

Submission frequency

Penalty threshold

Annual

2 points

Quarterly (including Making Tax Digital)

4 points

Monthly

5 points

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

Submission frequency

Time limit for notifying a point

Annual

12 months

Quarterly (including Making Tax Digital)

3 months

Monthly

1 month

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

Category of country

Deliberate and concealed

Deliberate not concealment

0

100%

70%

1

125%

87.5%

2

150%

105%

3

200%

140%

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.

About John Flood

About John Flood

John Flood is a retired barrister and ex-employee of HMRC. He is a co-author with George Rowell (Exchange Chambers, Manchester) of the new book, Tax Penalties: A Practitioners Guide (Sweet & Maxwell Thomson Reuters).

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31st Jul 2018 09:51

tax returns!!!!….I thought MTD assigned Tax Returns to the bin....perhaps they will be renamed 'penalty generating forms'...its the new growth area to clear the tax gap.

on a serious note they cannot properly deal with the one penalty a year....can you imagine the errors they will make under this system...but of course it will benefit the law abiding taxpayer

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01st Aug 2018 09:41

When you need people to write guides on the penalty system you know it's gotten way too complex.

And now a points system (with a bigger fine- like how they got that in?) for when people struggle to get their MTD Returns in on time.

As usual, will be completely disproportionate on the small fish who it will hit hardest.

Thanks (2)
01st Aug 2018 10:12

Quote:
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.”

Ermm, why? If penalties are charged only to encourage compliance, then fewer penalties does not automatically mean increased penalties, unless this is an admission that penalties are a planned revenue stream after all, and reducing the number means increasing the rest to maintain that stream.

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02nd Aug 2018 11:52

HMRC: Good news guys, we're dishing out less penalties!

Oh, by the way, here are 4-5 more submissions to make per year where you can potentially miss the deadline. And if you do get a penalty, it will be much higher than before.

Thanks (1)
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02nd Aug 2018 12:29

here's a novel idea - charge penalties like they do for speeding fines - the more you earn (the more tax at stake) the more you pay. Surely that would be fairer/more equitable?

Dash...thats what they did for years....of course they couldn't milk the low earning/tax refund individuals for penalties back then....

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