Making Tax Digital

This article has been provided by Alan McCann (DTE) Head of Tax Dispute Resolution

Following on from last month’s special update regarding MTD, we now turn our attention to the proposed penalty regime which will apply to taxpayers who do not comply when they should.

The government has already confirmed that taxpayers will be given a ‘grace period’ of a minimum of 12 months from when they become subject to MTD before any penalties will arise. HM Revenue & Customs (HMRC) has, however, set out three options for the new penalty regime for non compliance, as part of a consultation document issued on 20 March 2017, and are asking for responses by 11 June 2017.

It should be noted that the consultation document issued on 20 March 2017 does not set out the size of the proposed penalties, but the draft Finance Bill 2017 states that they would be capped at £3,000 for taxpayers who do not comply with MTD.

What are the options?

The penalty options under consideration within the consultation are as follows: –

Option 1 – Points-based system

The taxpayer 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 would be reset after a period of good compliance.

According to the example provided in the consultation document, this system is likely to allow for three non­ compliance incidents before a penalty is charged. If, after receiving a penalty charge, the taxpayer then meets all the reporting deadlines over a ‘sustained period’, their slate would be wiped clean and they would start anew without accumulative penalties. HMRC would consider a sustained period to be where a ‘number’ of submissions are provided on time for a set period, and have proposed the following:

Annually – 2 compliant submissions
Quarterly – 4 compliant submissions
Monthly – 6 compliant submissions

HMRC accept that there are concerns about the practicalities of the system and the length of the ‘sustained period’. Nevertheless, the consultation document states that the points system would be designed to ensure that isolated failures to submit would not incur a charge. HMRC also feel that the ability to ‘reset’ the points to nil would encourage a habit of providing submissions on time.

Option 2 – Annual HMRC review of compliance

As part of this proposal, HMRC would carry out an automated regular review of the taxpayer’s compliance with submission obligations once a year. The review would be carried out tax by tax, and it would be likely to be carried out within two months of the deadline following an annual submission. It is proposed that no penalty would arise in respect of the first failure, but if further failures arise a penalty would be charged at the time of that review, based on the number of failures.

The penalty would be for failure to comply quarterly, and not for the annual submission which will be treated differently. In terms of the annual submission, HMRC has set out three possible options for the timing of this annual review:

(i) To treat the end of period statement for the previous period of account as one of the submissions obligations occurring during the period of account being reviewed;

(ii) To carry out the review after the due date for the end-of period statement; or

(iii) To review compliance with the obligation to provide regular updates and the obligation to provide an end of period statement separately.

Option 3 – Suspended penalties (suspension of first penalty)

Finally, the third proposition is that HMRC would not charge a penalty immediately on the first failure.

Instead the penalty would be suspended on the condition that the customer provides the outstanding submission within a specified time. The document hints that taxpayers would have two late submissions before a penalty would become applicable.

Suspension could be applied on more than one occasion but it is likely that these occasions will be limited.

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