Introduction

The Northern Ireland Tax Committee of Chartered Accountants Ireland is pleased to have the opportunity to comment on the above consultation launched on 1 December 2017.

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 this consultation.

The current consultation has been badged as forming part of the Making Tax Digital (“MTD”) project. In reality this consultation presents options for aligning rules and rates for interest across the main taxes and includes aligning the high level rules for interest on VAT debt bringing these into line with income tax and corporation tax. The consultation also explores how late payment penalties could work and interact with interest. The comments herein are made in the aforegoing context but also taking into consideration the potential impact of the consultation proposals in the context of MTD.

The new model

The new model proposed for late payment penalties is set out in paragraphs 5.14–5.26 and is based on model C in the previous consultation.

According to the previous consultation document, under this model, the number of occasions on which a penalty would be suspended will be limited. Neither this consultation nor the previous one outline what that may be for each of the different taxes. This would be a critical element of this model and merits further discussion.

In addition, given the complexities of the proposed new penalty and interest model, it will be critical that taxpayers and agents are educated well in advance of its introduction, particularly given the potential to avoid this penalty by making payment or arranging a time to pay.

The consultation also mentions at paragraph 5.22 that a further penalty “of the tax due at 6 and 12 months” would be charged. As this new penalty is designed to penalise taxpayers for paying late, the penalty charged at 6 and 12 months should be based on the tax unpaid at those dates and not the tax originally falling due.

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 remain an allowable expense of the company under the loan relationship rules.

Soft landing

This consultation makes no mention of introducing a soft landing period for the introduction of the proposed new sanctions for late payment and harmonised interest rules. This will be particularly important where these arise in respect of filings mandated under the MTD project.

In the Addendum to the draft VAT Notice in MTD for VAT2, HMRC anticipates that there will be a soft landing period (without application of record-keeping penalties) in the first year to allow businesses, in certain circumstances, extra time to update legacy systems to be fully compliant.

This explicit recognition by HMRC that businesses will need time to adjust to this change could go further. Firstly, clarification of the specific circumstances which will be considered for removal of record-keeping penalties is needed.

In addition, the soft landing period envisaged should also include the removal of late filing penalties and payment sanctions for MTD VAT returns submitted late, those which contain errors caused by MTD for VAT or those which do not contain the necessary MTD for VAT information.

It is also not clear if the soft landing period will only apply for the period 1 April 2019–31 March 2020, the first year of MTD for VAT or, more sensibly, if it will cover all VAT return periods for the first year that a business exceeds the VAT registration threshold and falls within MTDfB for VAT.

In addition, even if a business has been able to avail of the soft landing period for VAT, when MTDfB for income tax is introduced, there should be a further soft landing period for this aspect.

We would also suggest that HMRC consider a longer soft landing period of at least 24 months. This would particularly assist those taxpayers who are facing the daunting task of moving to digital record keeping for the first time at a time when other business pressures and concerns will be foremost in their minds (for example when the UK leaves the European Union on 29 March 2019).

Powers, deterrents and safeguards

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

It is clear from the responses received to previous consultations 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”3.

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.

The introduction of Real Time Information

MTD is viewed as the biggest change to the UK tax regime since the introduction of self-assessment in the 1990s. Prior to its implementation, useful lessons can be learned from the recent implementation of Real Time Information (“RTI”) for PAYE.

The post implementation review of RTI4 found an overwhelming consensus that the migration of more than 1.5 million employers into RTI through a staggered implementation was the right approach. The review also found that many welcomed the programme’s willingness to adapt, for example by deferring the implementation of in-year penalties.

However there is no doubt that the deferred implementation of penalties and many of the exemptions announced for smaller business which only took effect after RTI commenced should have been considered before the regime’s start date. HMRC should learn from this in advance of the introduction of MTD.

In addition, whilst RTI is seen by some to be performing well, it has taken nearly five years to reach this point. A number of data quality issues and mismatches between HMRC and employer records continue to create discrepancies that can be time consuming and costly to resolve for employers, their agents, and for HMRC.

If new penalty models are to be introduced, HMRC will need to consider if its systems will have the ability to provide real time accurate views of data submitted so that taxpayers are always dealing with the most up to date information. This will be particularly important in the 30 day window after a return is due to be submitted when no/reduced penalties can arise.

Safeguards

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.

This will be particularly critical in the proposed 15 day window after a due date so that the taxpayer is able to take action and make a payment or arrange a time to pay to avoid a late payment penalty. However we would point out that 15 days is a particularly short window to take evasive action and that this should be extended to 21 days after which a further two week window would begin within which the penalty would be halved.

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 coupled with the uncertainty presented by Brexit and post Brexit trading arrangements.

A new Customs Declaration System is also due to be unveiled in the UK in 2019. This system was originally designed to manage around 100 million transactions a year but post Brexit, it is estimated that these transactions will increase by around 200 million5.

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.

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

The role of the agent

As part of MTD, it will be vital for agent’s to have access to their client’s digital tax accounts. Where 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 success6.

Conclusion

Chartered Accountants Ireland has no issue with a penalty system 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.

The timing of the start date of MTD for VAT on 1 April 2019 comes just days after the UK will leave the European Union. Already, businesses and their agents are experiencing severe pressure on their time and resources given the particular challenges that Brexit issues, such as customs regulations bring.

In that context, as a minimum we believe that the following three key recommendations would be helpful to businesses and their agents in the context of this consultation:-

1. The window within which a taxpayer either pays the tax due or arranges a time to pay before a late payment penalty is charged should be 21 days and not 15; and
2. A reasonable and fair soft landing period of at least 24 months should be considered for any MTD related sanctions or any new penalties or changes to the current regime are introduced; and
3. Agents should have access from the outset to their client’s digital tax accounts which should be updated in real time with accurate and complete information.

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.

Finally, do not hesitate to contact Brian Keegan (brian.keegan@charteredaccountants.ie) or Leontia Doran (leontia.doran@charteredaccountants.ie) of this office should you require anything further.

Yours faithfully,

Paddy Harty

Chairman

Northern Ireland Tax Committee

Chartered Accountants Ireland

Source: Chartered Accountants Ireland. www.charteredaccountants.ie

2 https://www.gov.uk/government/uploads/system/uploads/attachment_data/fi le/668753/Addendum_to_VAT_Notice_on_Making_Tax_Digital_for_VAT.pdf

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

4 https://www.gov.uk/government/publications/real-time-information-programme-post-implementation-review

5 https://www.nao.org.uk/wp-content/uploads/2017/07/The-Customs-Declaration-Service-Summary.pdf

6 Parliament of the Commonwealth of Australia “2016 Report of the Australian Tax Offi ce: Performance Review 2015–16”, March 2017 page 39