The consultation on MTD and tax administration says HMRC intends to stop applying penalties to each failure and replace this with a much more gradual model whereby each failure would attract penalty points. Only once the points reach a set level would a penalty be charged.

HMRC argues that this ensures taxpayers are not charged a penalty the first time they are unintentionally late in complying with a submission obligation, although it is proposing that a stronger response should be applied to those who are what it terms ‘deliberately non-compliant’. The amount of any penalty charged would reflect the help received from the taxpayer to establish the correct amount of tax due.

Once a penalty has been incurred, the individual or business would incur further penalties if they failed to meet their subsequent submission obligations. HMRC’s illustration of the ‘basic model’ of this approach suggests it would normally take four points to trigger a penalty. The points total would remain unchanged until ‘a sustained period of compliance’ means it is re-set to zero, which HMRC suggests should be 24 months.

HMRC says it believes this model could work for monthly, quarterly and annual obligations and for information-only obligations such as EC Sales Lists. However the number of points incurred for the failed obligation might need to vary depending on the frequency of the obligation to ensure that the customer has enough time to remedy their non-compliance before the points result in a penalty.

HMRC concedes that this approach would be unsuitable for occasional obligations (such as the filing of inheritance tax returns), where it is unlikely that points incurred could act as a warning system to encourage a return to compliance.

Escalator model

The consultation also considers an ‘escalator model’ for persistent offenders, with taxpayers incurring further points to reflect the fact that a submission was still outstanding. For the purposes of illustration, one point is incurred for each occasion of lateness and a further two are added if the submission remains outstanding when the next submission (and any subsequent submissions) are due. A total of five points will trigger a penalty.

HMRC suggests there would be a 12-month ‘period of grace’ before the new approach was introduced so that taxpayers could familiarise themselves with the regime. This means the new penalties would not be in force before 2019.

The proposals have been slammed by Yvette Nunn, CIOT council member and co-chair of ATT’s technical steering group, who described the proposals as a ‘cash cow’ for HMRC, saying they took no account of difficulties which taxpayers may face as a result of unexpected life events.

‘For individuals, MTD effectively means they have a tax return every three months, while businesses face submitting tax information four times a year, plus quarterly VAT returns, auto enrolment and potentially in some cases the apprenticeship levy. It’s a huge administrative burden and individuals in particular are likely to panic,’ Nunn said.

Nunn argued that the penalty system would be automated, so there would be no opportunity to consider why someone had been late filing information, for example because of personal problems.

In the consultation, HMRC says it is proposing to treat payment obligations as distinct and separate from obligations to submit information, and wants to introduce two new sanctions for paying tax late.

The first is the use of penalty interest to be charged on taxpayers who fail to pay in full within fourteen days of the due date, or who before that date have failed to enter into arrangements to pay over an agreed period to which they then adhere. Secondly, HMRC wants to revise existing legislation to deliver an aligned penalty regime for income tax, VAT and corporation tax.

The consultation illustrates a number of penalty options, including increasing penalties for non-payment of income tax due. The suggestion here is a first penalty charged at 4% of tax outstanding at the first penalty date (30 days after the due date), with a 10% penalty at the second penalty date (six months after the due date), rising to 15% of tax outstanding at the third penalty date (12 months after the due date).

HMRC compliance powers

 There are also plans to adapt HMRC’s compliance powers to match new MTD requirements. 

As regards extending its powers to investigate compliance, HMRC says that while it is not seeking a new power to enquire into regular updates, it is important that HMRC can check any of the information that is included in a customer’s End of Year declaration and is used to calculate their tax. In some circumstances, this means a taxpayer or business’s digital records may form part of any enquiry.

Consultation document

The HMRC Making Tax Digital consultation: tax administration is here

The closing date for response to the proposed penalty system closes on 7 November 2016.