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UK Commits To Fair 'Making Tax Digital' Penalties

by Jason Gorringe,, London

15 December 2017

The Chartered Institute of Taxation says it is pleased that its concerns about the fairness of penalties for filing late under Making Tax Digital (MTD) – the UK's upcoming tax administration modernization reforms – will be addressed by the tax agency.

In particular it welcomed confirmation that penalty points will have a "shelf life" and will therefore expire after a period of good compliance by a taxpayer.

Other CIOT recommendations that HM Revenue and Customs has said it will consider before implementing the new regime include that submission of already late returns will be incentivized, making penalty points as well as actual penalties appealable, maintaining the taxpayer's ability to claim a reasonable excuse for failing to meet a filing obligation, and that penalties should apply on a tax-by-tax basis.

MTD was a controversial announcement, with concerns about the administrative burden on small firms in particular. Initially, the UK Government was to introduce mandatory digital record-keeping from April 2018 by small businesses and landlords.

In July 2017, the UK Government delayed record-keeping obligations concerning income tax until at least April 2020 and provided that, from 2019, only businesses with a turnover above the value-added tax (VAT) threshold, currently GBP85,000 (USD110,000), will have to keep digital records and only for VAT purposes. They will have to: keep their records digitally (for VAT purposes only), and provide their VAT return information to HM Revenue and Customs (HMRC) through MTD-functional compatible software.

In its response to a recent consultation, HMRC confirmed that the penalty system for late submissions under MTD will be a points-based model. Draft legislation will be published in summer 2018. It is anticipated that the model will first be implemented for VAT in 2020, to allow for taxpayers within MTD for VAT a period of 12 months to become familiar with their new obligations after they first become subject to MTD in April 2019.

John Cullinane, Tax Policy Director at CIOT, said: "It is encouraging that HMRC have taken on board many of our concerns about the points-based model. The original proposals with their lack of a shelf life for points would likely have been ineffective as well as unfair because there would have been little incentive to improve one's behaviour if points stuck with you for too long regardless of your ongoing compliance."

"It is going to be essential that points are clearly visible so that individual taxpayers are aware of how many points they have accrued, how they can avoid accumulating further points and when they are approaching the stage of incurring an actual financial penalty. HMRC's communications in educating taxpayers about MTD and their new compliance obligations, as well as the quality of its digital systems, will be critical to the smooth operation of the regime."

"We agree that both points and actual monetary penalties must be appealable, but this will create a significant practical challenge for HMRC's systems, and the Tribunals. The appeals system will need to be largely automated, to cope with what could be a huge number of appeals, given the increased number of filing obligations that MTD requires from taxpayers, but must be easy to use, fair and free from manipulation."

TAGS: compliance | tax | small business | business | United Kingdom | legislation | HM Revenue and Customs (HMRC) | penalties | HM Revenue and Customs (HMRC) | Other | Tax

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