Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation launched on 20 March 2017 as part of the Making Tax Digital (“MTD”) project and specifically as the second consultation on new sanctions for late submission and late payment. 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 on some specific aspects of the current consultation.

Chartered Accountants Ireland notes this consultation as being the third in a series of consultations looking at penalties and sanctions and the second to specifically address these in the context of MTD.

It is clear from the responses1 received to “HMRC penalties: a discussion document” that aspects of the current system are not working well. The introduction of MTD will be extremely challenging for taxpayers, HMRC and tax agents alike. Thus it will be critical to ensure that any penalties and sanctions for this regime are clear from the outset and are in line with the five principles set out in “HMRC Penalties: a Discussion Document”.

Powers, deterrents and safeguards

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 five 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 “soft landing period”

The late submission penalty models proposed in chapters 3-5 of this consultation will cover all types of late submissions under MTD (both the quarterly updates and the End of Year submission) for income tax, VAT and corporation tax.

Chapter 2.6 makes clear that these penalties will be subject to a form of “soft landing” so that taxpayers who are within the scope of new submission obligations being introduced by MTD have a period to gain familiarity with the new system before the associated penalty regime begins.

That soft landing period is proposed to be 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 as many taxpayers will be facing quarterly filing deadlines for the first time and will also face a much earlier deadline for their final End of Year submission than they would have had under self-assessment.

For example, a taxpayer who prepares accounts to 30 June will first be within MTD for business (“MTDfB”) for the accounting year ending 30 June 2019. Their final MTDfB submission will be due by 30 April 2020, a full 9 months earlier than the 31 January 2021 filing deadline under the current self-assessment rules. This will already have been preceded by four quarterly submissions.

A longer soft landing period of 24 months would particularly assist those taxpayers who are facing a much earlier final filing deadline which is now dependent on their accounting period end and not which tax year it falls into. It would also support those taxpayers who have moved into digital record keeping who have the added concern of making (at the least) five submissions on an annual basis compared to one previously.

Model A – points based penalties

Under the model A proposal for points-based 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 too long and 12 months would be much more appropriate for MTDfB submissions. This would be in line with the 12 month “compliance clock” system currently in place for VAT default surcharges.

As penalties would be based on points reaching a certain threshold, it will be critical to consult and consider what threshold is appropriate for each tax.

Figure 3.1 of the consultation document illustrates how the model would work for a business within MTD. As the current “soft landing” period for MTD late submission penalties is 12 months, penalties would not apply until year 2 of the taxpayer being within MTDfB.

However we think it would be very unfair to catch the End of Year submission for year 1 simply because its deadline falls within year 2. The first End of Year submission should be excluded from late submission penalties particularly given the high probability that for many taxpayers this will fall due for submission much earlier than the 31 January self-assessment deadline they are used to. Our earlier example of a taxpayer preparing accounts to 30 June used in connection with our comments on the “soft landing” period is once again worthy of mention.

Model B – regular review of compliance

The proposed automated review of a taxpayer’s compliance profile would be carried out once a year on a tax by tax basis. As part of this model, keeping the taxpayer advised in-year of where they have missed deadlines will be critical. Where a taxpayer has a number of filing obligations, penalties could accumulate very quickly leaving the taxpayer with insufficient time to act if they are not adequately warned. This will leave them unable to take remedial action.

This model also proposes that the annual review would be carried out within two months of the deadline for providing the submission. For MTDfB submissions, we would suggest that the review be carried out after the due date for the End of Year submission of the relevant accounting period.

It is also not clear how realistic it would be to carry out this review within two months. To give taxpayers certainty, the review should have an outside time limit within which it must be carried out by HMRC or the potential penalties chargeable are forfeited.

Again we would recommend that the first review after the soft landing period has ended does not take in late End of Year submissions for year 1. Furthermore, we would not be supportive of separate processes to review the quarterly submissions and the End of Year submission. From a penalty perspective these submissions all relate to one period of account and thus one review process should apply to them all.

Model C – suspension of penalties

Under this model, the number of occasions on which a penalty would be suspended will be limited. The consultation does not expressly suggest what that number may be for each of the different taxes. This would be a critical element of this model and merits further discussion.

Figure 5.1 sets out how this model might work for a business within MTDfB after the soft landing period has ended. Once again, we would stress that the first End of Year Submission under MTDfB should not be included within the submissions which can be caught for a late submission penalty. All submission deadlines which relate to the first period a taxpayer is within MTDfB should be subject to the soft landing window.

As an overall point, we think it is too early to consider which of the above models would be best particularly when the level of potential penalty chargeable for each of the taxes appears nowhere in the consultation document. However, on balance, we think the points based model would be the clearest for taxpayers and would meet each of the five principles set out in “HMRC Penalties: a Discussion Document”.

Penalty interest

We wish to make a number of observations in relation to the charging of penalty interest. The current consultation proposes to introduce penalty interest as a new sanction for late payment of corporation tax, income tax and VAT in lieu of aligning existing late payment penalty regimes. We note that in due course this would be extended to all taxes.

The charging of a higher rate for penalty interest would add unnecessary complexity to the rules. The consultation refers to two potential rates neither of which we believe to be fair in any manner. A rate in the region of 10% is purely punitive. The function of penalty interest is to encourage taxpayers to pay on time. Punitive rates would blur the line between the differing functions of interest and penalties. They also raise the issue of whether or not penalty interest should be appealable as a penalty, recognising the general principle that any penalty, however applied, should be open to appeal.

The consultation proposes that penalty interest would commence just 14 days after the payment deadline. This is too short a period. If penalty interest is to be charged at a higher rate, then it should commence only after a much more reasonable time period has passed which allows for personal factors which can often be the reason behind late payment. We would suggest that 21 days is more reasonable.

As a final point, we would ask if, as is the case with late interest on corporation tax, whether penalty interest for late payment of corporation tax will be an allowable expense of the company under the loan relationship rules.

Safeguards

We agree that it will be critical to keep a record of failures that do not, immediately, give rise to a penalty. As part of that it will be vital that the taxpayer is informed, on a timely basis, that a penalty would otherwise have arisen and the reason it is not being charged at that time. As part of this, agents should have access to their client’s digital tax accounts. We return to this point later.

Digitally excluded

This consultation makes little mention of provision for those who are digitally excluded. HMRC’s own research2 found 15% of the UK’s population, equivalent to over seven million adults, to be digitally excluded. This population will not benefit from a digital tax account which is likely to form the basis for a new way of charging penalties and informing taxpayers in year of their compliance position.

The digitally excluded 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

A key aspect of MTD is the obligation for taxpayers to keep business records digitally. Existing record keeping legislation will need to be modified to reflect those proposals.

There is no mention in the current consultation nor within the previous consultation “Making Tax Digital: Tax administration” of what the changes to existing recording keeping legislation might be and what penalties may be imposed for failure to meet that obligation. This is somewhat surprising given that digital record keeping is a fundamental aspect of the MTD project. The overall penalty position for MTD should be clear from its introduction next April.

Alignment

At present, each of the models would assess the penalty position of an individual taxpayer on a tax by tax basis. Whilst the penalty rules for late submission would be aligned for each of the three taxes, the charging of penalties would not be based on the overall compliance picture of the taxpayer. This would be the most desirable model to achieve the Government’s objectives in establishing a late submission penalty model in line with the five principles.

IT systems

Underpinning each of the proposed penalty models is the critical assumption that HMRC’s systems will be able to accurately record and maintain a record of each taxpayer’s compliance obligations and submission patterns. 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, not alone in the area of penalties.

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 record and assess a taxpayer’s compliance behaviour across the taxes which are subject to MTD.

The role of the agent

As part of this process we believe it will be even more vital for agent’s to have access to their client’s digital tax accounts. Where late submission penalties are concerned, the agent could play a vital role in making their client aware of where penalty trigger points may be and in assisting their clients to fulfil their compliance obligations.

Although MTD is not directly comparable to the current digitisation plans of The Australian Tax Office (“ATO”), the ATO has recognised early in their digitisation process that allowing tax agents to have full access to their clients’ records from day one is a fundamental and necessary requirement to the scheme’s success3.

Conclusion

In conclusion, alignment of the penalty rules across the different tax heads taking into consideration the taxpayers overall compliance picture should be an overall goal of any penalties review, where possible. The opportunity should be taken 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.

Chartered Accountants Ireland has no issue with a penalty system for MTD that is fair, proportionate and helps promote 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.

Each of the models proposed for late submission penalties would be a huge departure from current practice and thus a reasonable and fair soft landing period of at least 24 months should be considered.

Freedom of Information

We note the scope of the Freedom of Information Act with regards to this submission. We have no difficulty with this response being published or disclosed in accordance with the access to information regimes. This response will be published on our own website in due course and will be available to all of our members and the general public.

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-andassisted-digital-research

3. Parliament of the Commonwealth of Australia “2016 Report of the Australian Tax Office: Performance Review 2015-16”, March 2017 page 39