Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation launched on 15 August 2016 as part of the Making Tax Digital (“MTD”) project. Information about Chartered Accountants Ireland and the Northern Ireland Tax Committee are provided on the previous page.

We would be happy to discuss any aspect of our comments herein and to take part in any further consultations/initiatives in this area that there may be in the future. We wish to comment briefly on some specific aspects of the current consultation. Our comments herein have been compiled from feedback received from our members via various channels over the course of the last few months.

Chartered Accountants Ireland welcomes and supports this review of tax administration and penalties in particular as a follow up to last years’ HMRC penalties: a discussion document. It is clear from the responses1 received to that discussion document that aspects of the current system are not working well.

Powers, deterrents and safeguards

As part of this consultation, we think it would be sensible for HMRC to carry out research into taxpayer behaviour. A post-implementation review of the Powers, Deterrents and Safeguards Review should also be undertaken to inform the current consultation.

In 2009 the Implementation Oversight Forum was established. That forum was set up to provide assurance to the Exchequer Secretary to the Treasury and the HMRC Chairman and Commissioners that the policy outcomes of the review of powers, deterrents and safeguards were being delivered in line with the undertakings given to Parliament. We understand that this forum produced three annual reports for the Minister responsible for HMRC and last reported for the year to 31 March 2012.

Given the scale of change within HMRC over the last four years and proposed changes still to come, it would seem sensible to us that the Implementation Oversight Forum be re-established and tasked with conducting a post implementation review of HMRC Powers, Deterrents and Safeguards. Any changes made to the penalties regime should only be made after such a review and research has been conducted.

Late submission penalties

The late submission penalty models proposed in chapter 3 will cover all types of late submissions including those under MTD (both the regular updates and the End of Year declaration). The Government propose a form of “soft landing” so that taxpayers who are within the scope of new submission obligations being introduced by MTD should have a period to gain familiarity with the new system before the associated penalty regime begins.

That soft landing period is proposed at 12 months. Given the scale of change MTD will bring, we do not feel this is an appropriate length of time to allow taxpayers to become familiar with these new obligations. 24 months would be much more realistic.

Under the model 1 proposal for late submission penalties, the penalty points total would be re-set to zero after the taxpayer has achieved 24 months of compliance with their submission obligations. We think 24 months is simply too long and 12 months would be much more appropriate. This would be in line with the 12 month “compliance clock” system currently in place for VAT default surcharges.

As a final point, we would not be supportive of the escalator model outlined in chapter 3, particularly where late submission of quarterly information is proposed. Points could accumulate very quickly leaving the taxpayer with insufficient time to heed and act upon any warnings.

Digitally excluded

Disappointingly, this consultation makes little mention of provision for those who are digitally excluded. HMRC’s own research2 found 15% of the UK population, equivalent to over seven million adults, to be digitally excluded. This population will not benefit from a digital tax account which forms the basis for a new way of charging penalties.

They will also not benefit from the full range of reminders and information supplied digitally. HMRC must ensure that taxpayers in this position are provided with services which are comparable with, and not inferior to, the digital services being developed.

Digital record keeping

The consultation refers to a new obligation for certain customers to keep records digitally on software that links to and updates HMRC and that existing record keeping legislation will need to be modified to reflect those proposals.

There is no mention in the current consultation or within the remaining MTD consultations of what the changes to existing recording keeping legislation might be. This is somewhat surprising given that digital record keeping is a fundamental aspect of the MTD project.

Nevertheless we reiterate our objection that records must be kept in a digital format. We outline our concerns in this regard in more detail in our response to the consultation “Bringing business into the digital tax age”.

Interest

The consultation refers to the possibility of the alignment of interest rules across income tax, VAT and corporation tax. We would be supportive of alignment in principle but we would not be supportive of altering the interest rules so that higher rates would apply in some situations, as was suggested in HMRC’s penalties: a discussion document.

The interest rules, in their current format, are simple. Higher interest rates in some situations would add unnecessary complexity to the interest rules. The function of interest is to provide financial compensation to the Exchequer when tax is not paid on time. Punitive interest rates would blur the line between the differing functions of interest and penalties. They also raise the issue of whether or not penal interest should be appealable as a penalty, recognising the general principle that any penalty however applied should be open to appeal.

Conclusion

It is clear from this consultation that changes to the penalty regime are very closely linked with the MTD project as it relates to both businesses and individuals. So that this is effective, any new IT systems must work as intended, for both the taxpayer and HMRC. Data must be accurate and up to date if it is going to be used to prepopulate tax returns and assess a taxpayer’s compliance behaviour.

HMRC is currently in the process of a major IT transition. Timed with the MTD proposals, this raises concerns about whether HMRC’s systems will be able to cope with the inevitable scale of change required.

Alignment of the penalty rules across the different tax heads should be an overall goal of any penalties review, where possible. The opportunity should be taken now to consolidate and simplify the legislation on penalties.

If penalties are to be effective as a deterrent and as a means to drive compliant behaviour, taxpayers should be informed about the penalty regime and be able to understand how the rules apply. HMRC should look at how it can do more to publicise the rules for penalties and other sanctions, and examine how it can provide better information and support to taxpayers.

In conclusion, Chartered Accountants Ireland is supportive of a penalty system that is fair, proportionate and drives compliant behaviour. But it also needs to be clear, simple and consistently applied. Penalties should not be considered in isolation but in the context of the other sanctions and deterrents for non-compliance that exist within the UK tax system.

Source: Chartered Accountants Ireland, www.charteredaccountants.ie

1. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/461357/HMRC_Penalties_a_Discussion_Document_–_Summary_of_Responses.pdf.

2. https://www.gov.uk/government/publications/digital-exclusion-and-assisteddigital-research.