In a bid to make the penalty system ‘fairer and simpler’ HMRC announced in 2017 that it was looking to reform tax administrative penalties. The reform will cover both late filing penalties and late payment penalties.

Late submissions

The existing late filing penalty regime sees a penalty issued as soon as a filing deadline is missed, with additional penalty charges, some daily, becoming due the longer a return is outstanding. The new regime looks to move towards a points based system where a defined number of penalty points will accrue each time that taxpayer fails to submit a return on time, therefore focusing on those who persistently file late.

The reform supports the Making Tax Digital (MTD) project with the new regime expected to initially apply to VAT filing obligations from April 2021 only. However, going forward, the government plans to roll out the new regime across as many taxes as possible, particularly those with regular filing deadlines.

Under the new regime a point would be incurred automatically where a return is filed late. Points accumulated and not disputed will remain on the taxpayers record until their expiry date, being two years from the month after the month they were incurred.

A fixed penalty will be applied once a points threshold, dictated by the frequency of submission obligations, is reached. A point incurred for say, a corporation tax return filed late will not be added to a point applied for say, a late VAT return. Once the threshold is met no further points will accrue, however the existing points will no longer expire after the two year timeframe noted above. Instead, the only way to remove these points, and re-set the record to zero, is to meet all filing deadlines for that tax over a ‘good compliance’ period.

Proposed penalty thresholds

Annual submissions: 2 points Quarterly submissions: 4 points Monthly submissions: 5 points

Proposed good compliance periods

Annual submissions: 2 submissions Quarterly submissions: 4 submissions Monthly submissions: 6 submissions

It has also been confirmed that, under the new regime, penalties received for the late filing of partnership related returns will relate to the partnership itself, rather than each individual partner being liable as is the case under the current regime.

Late payment

The proposed changes look to harmonise the late payment penalties and interest accrued for corporation tax, income tax and VAT. Currently there are no late payment penalties applied when companies fail to make the necessary corporation tax payments at the agreed time, it is simply a case of interest being charged at the prevailing HMRC rate. As well as address the corporation tax payment penalties, the new regime aims to align the interest charges for VAT with those for income and corporation tax.

The government wants to encourage taxpayers to pay on time. By introducing two penalties, the first relating to 30 days following the payment due date and the second for payments which remain outstanding after 30 days, the government hopes to encourage taxpayers who cannot pay to agree a Time to Pay (TTP) arrangement as soon as possible within the first penalty timeframe.

No penalty will apply where a payment is made or a TTP agreement is confirmed before the end of 15 days from the due date. Where payment or a TTP agreement is made between 16 and 30 days from the due date the penalty will be half the applicable percentage of the tax outstanding.

For payments which remain outstanding, subject to any TTP agreement in place, after 30 days the first penalty becomes payable in full and the second penalty will start to accrue. At this stage the applicable percentage and the level of the second penalty is still unknown, however it has been confirmed that if the TTP agreement is broken the penalties noted above will fall due.

As well as the two penalties HMRC will continue to charge interest on any tax paid late regardless of how late the payment is made. Both the late filing and late payment regimes were originally expected to be introduced alongside MTD, however although MTD for VAT is now applicable, the government announced, during the 2018 Budget, that the penalties reform would be delayed until at least April 2021. Until that time the current penalty, interest and surcharge regimes will continue to apply.

As a result of the delay, it is expected that the legislation implementing these new regimes will be included in the 2020 Finance Bill, and although it has already been confirmed both the penalty points and fines will be appealable, there has been no detail provided regards the level of penalties which will apply, clearly a key point which will be of interest to taxpayers and professionals alike.

If you have any questions or would like to discuss your thoughts on the above, please do get in touch with our team who will be happy to help.

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