MTD penalty regime must be simple, fair and effective

21 June 2017

HMRC last week closed a consultation which sets out its proposals for new sanctions for the late submission of returns and late payment of tax under the forthcoming Making Tax Digital (MTD) regime.

Making Tax Digital is a key part of the government’s plans to make it easier for individuals and businesses to get their tax right and keep on top of their affairs. One of the goals of the new penalty regime is to help businesses get their tax right first time but to do this without feeling punished for making honest mistakes. 

On late filing, HMRC suggested three different approaches

  • Model A – a points-based approach, under which a penalty would be charged when a certain points threshold is reached (similar to driving offence points).
  • Model B – an automated regular review system, with points being given subject to compliance history.
  • Model C – a suspended penalty system under which, for an initial offence, more time would be granted to make a submission before a penalty is imposed.

Of the three options, we have indicated our support for option A – a single points based penalties system. We believe this should ideally cover all of the taxpayer’s submissions. Such a system would provide the necessary effective deterrent against non-compliance while being sufficiently simple for taxpayers to understand.  

However, we were disappointed to see that HMRC has stated its preference for separate penalty regimes covering each separate tax regime. In our view, this may add unnecessary complexity which could potentially compromise the regime’s effectiveness.

Whichever model is selected, we also believe that those taxpayers who make only one-off or occasional mistakes should be protected from onerous penalties. We therefore support a system in which cumulative points are required to trigger a penalty, such that penalties are charged only where there is a pattern of poor compliance. We would also support the option to suspend penalties to prevent isolated incidents being punished unnecessarily.

The consultation also sought comments on the imposition of penalty interest for late payment. Whilst we are supportive of the general principle, our view is that there is scope for the charging of penalty interest as well as interest on late paid tax to produce disproportionately onerous outcomes. If HMRC were to proceed with this, we feel that 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.

Fundamentally, the new system must be effective in acting as a deterrent against non-compliance. Taxpayers must clearly understand what they need to do to comply and to avoid suffering a penalty. Fairness is also very important – those regularly ignoring the new system should be penalised more robustly than those who suffer from occasional forgetfulness. 

Please contact Mike Down if you would like to discuss this matter in more detail.