The draft Finance Bill 2018-19 outlines some landmark changes for HMRC’s penalty system. It affects two strands: missed tax return filing deadlines and late tax bill payments.
Currently, there are automatic penalties for missing submission and payment deadlines, which start at £100 and increase incrementally by the day up to a set ceiling. The purpose of the new points system is, in HRMC’s own words: “… to encourage compliance with regular return submission obligations but does not want to punish taxpayers who make occasional mistakes. This measure is designed to be proportionate, penalising only the small minority who persistently fall foul of the rules.”
The automatic fine has long been criticised for its potential unfairness and administration cost. Perhaps this is a move in the right direction. The new system will only result in a financial penalty if you accumulate a set number of points; similar to getting points on your driving licence. And the direct opposite of the points means prizes store loyalty cards system.
Who do the new penalties apply to?
It is expected that this new system will be in place for processing April 2020 VAT returns, to begin with. Other types of tax declarations and payments, like self assessment tax returns and Corporation Tax Returns, are to be incorporated in due course. This is still in draft, so all the details are subject to consultation and subsequent approval.
How will the penalty system work?
HMRC explains: “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.”
Here are the proposed points’ thresholds and the amount of time HMRC has to tell you that you have got tax points.
Monthly returns: 5 points before a fixed penalty, HMRC have one month to inform you
Quarterly returns: 4 points before a fixed penalty, HMRC have three months to inform you (this includes Making Tax Digital)
Annual returns: 2 points before a fixed penalty, HMRC have 12 months to inform you
How much are the fines in the new system?
The amount of each fine has not yet been announced. HMRC have said: “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.”
Getting a clean sheet
After two years, the points automatically expire and you have a clean sheet again. But this two years must be a period of good compliance, which means getting everything in on time during these 24 months.
If you change from one type of return to another, that has a different filing frequency, the amount of points threshold will be adjusted accordingly. This flexibility is designed to ensure that neither HMRC nor the taxpayer gains or loses from a change of tax position.
Not set in stone
There is a possibility that a reasonable excuse could remove the points and subsequent fine altogether. This is entirely down to HMRC’s discretion, on a case by case basis and includes situations like third party software issues, serious illness and HMRC computer difficulties.
An appeals process is also in place for taxpayers who would like their position to be reviewed by the FTT. HMRC are able to grant a period of grace where points are not given to the taxpayer if the situation is resolved within a set time period.
Late paying your tax bill?
There is a new penalty system proposed for those who are late paying their tax bill within the same draft finance policy. This will see the introduction of two penalties, one payable 15 days after the deadline, the other at 30 days. The new penalty system will apply to VAT, corporation tax, income tax and capital gains tax.
Powers to penalise withholding information
The draft policy also provides HMRC with new power to impose a fine if it finds that a taxpayer has deliberately withheld information it needs to calculate their tax position. The penalty will be a percentage of the tax bill due. HMRC will have discretionary power to reduce fines if the taxpayers is subsequently co-operative.
Our advice remains the same to make sure you meet all the HMRC deadlines that apply to you. If you don’t know what they are, find out now. If you’ve got them on your calendar, add in a plan for how you’re going to get there on time. Have you worked out exactly what paperwork you need? Do you know where it all is? Is there a date, or dates, in your diary with your accountant or tax professional?
They may not have any time left, if you leave it until the last minute. As more elements of the tax process are being put on the taxpayer, it is increasingly important that you know what your liability is. And for goodness sake don’t waste any of your hard earned money on paying HMRC fines which is usually totally unnecessary with a little forward planning.
