The Treasury’s Red booK of proposals states that the government will reform the penalty system for late or missing tax returns, adopting a new points-based approach.

It will also consult on whether to simplify and harmonise penalties and interest due on late payments and repayments. Final decisions on both measures will be taken following this latter consultation.

HMRC has already held two consultations on devising a new penalty system in conjunction with its proposals for Making Tax Digital.  The most recent one, which closed in June, proposed three options.

The first is a points-based system, revised since the first consultation so that it would apply per tax, rather than across all taxes.  Taxpayers would receive a point each time they failed to provide a submission on time. When the points reach a certain threshold a penalty would be charged. The points are reset after a period of good compliance.

The second proposal was for an automated regular review of the taxpayer’s compliance with submission obligations over a set period. There would be no penalty for the first failure during the set period. If there are further defaults a penalty would be charged at the time of the review, based on the number of failures.

The final option was suspension. Under this approach HMRC would not charge a penalty immediately on the first failure. Instead it would suspend the penalty on condition that the taxpayer provides the outstanding submission within a specified time. Suspension could be applied on more than one occasion but HMRC said the number of occasions on which a penalty would be suspended would need to be limited.

Now the government has indicated in the Budget which of the three alternatives to pursue, the ATT considers that there should be consultation on the detail in order to ensure that the new penalty delivers its intended results.

Yvette Nunn, co-chair of ATT’s technical steering group, said: ‘As we noted in our response to the previous consultation, the points system proposed appeared to throw up some anomalies. Under the proposal, it appeared that some persistent defaulters might avoid a penalty while some more compliant taxpayers could incur a penalty.

‘The arrival of Making Tax Digital for VAT in April 2019 with its requirement for quarterly returns makes it essential that the points based penalty system has been properly thought through. That needs consultation with businesses and agent representatives to ensure a smooth launch. 

‘There is too much risk of the system producing unintended consequences if it has not been properly considered. The introduction of Making Tax Digital involves massive changes for business in their record keeping and reporting to HMRC. The new penalty system has a key role in ensuring the success of Making Tax Digital.’

The ATT’s submission to the second consultation stated that a points-based system was unlikely to be well understood by the majority of taxpayers, and noted ‘for the minority who were instinctively less compliant, we suspect that they might learn to play against the rules’.

At the time, the association supplied spreadsheets to support its claims that the concept of good compliance periods could operate in a surprisingly arbitrary manner. Combined with the absence of any overriding shelf-life for points, they can result in patterns of more significant non-compliance avoiding penalties completely while more compliant patterns can incur multiple penalties.

Closed consultation Making Tax Digital - sanctions for late submission and late payment is here

Report by Pat Sweet