Press release: Experts question viability of taxpayer penalties under HMRC’s Making Tax Digital

The ATT’s comments are included in its response¹ to HMRC’s consultation Making Tax Digital: Tax administration.²  The consultation sets out HMRC’s proposals for the changes that might be required to the existing penalty regime in order to support the radical MTD programme, which HMRC expects will go live from April 2018.

Under MTD, all trading and property businesses other than those which fall within limited exemptions will be obliged to keep their business records digitally and to provide quarterly summaries of income and expenditure to HMRC.

ATT has three major concerns about the penalty proposals:

The consultation does not indicate what penalties will apply if a taxpayer fails to keep their business records digitally. If the existing legislation³ is not overhauled, it would enable HMRC to charge penalties but without any power to suspend⁴ the penalty. That, in ATT’s view, misses a significant opportunity to encourage taxpayers to learn how to meet their ongoing obligations.

If a taxpayer has no right to appeal against a penalty point,⁵ their opportunity to explain why they were late in filing a declaration or a quarterly report would be delayed until they accrued enough penalty points to trigger a financial penalty – by which time they might no longer have the evidence to support their appeal.

The consultation proposes that a taxpayer would need to have a clear 24-month period of meeting all deadlines before a penalty point was removed from their record. That means that someone could incur a monetary penalty despite having only four late quarterly submissions in almost six years. 

Yvette Nunn, Co-chair of ATT’s Technical Steering Group, said:

“There are important questions about the thinking behind the proposed penalty regime. It is absolutely vital that the penalty regime encourages compliance with MTD in a positive way. If a taxpayer does not understand how to keep their records digitally – which many will not – simply penalising that lack of understanding will achieve nothing.

“For example, just telling a taxpayer that their spreadsheet record of income and expenditure is not digital is likely to leave them confused. Explaining that the paperwork for every transaction needs to be recorded (which we oppose in principle) would at least help them understand their obligation.  If HMRC imposes a suspended penalty with well-considered and practical conditions that are likely to encourage the taxpayer to get things right in future, that is likely to have a much better long-term outcome for the taxpayer, HMRC and the Exchequer.

“Under the penalty points system, HMRC expects a monetary penalty to be charged if a taxpayer builds up four penalty points but without any provision for an appeal as the points are built up. It is essential for taxpayers to be able to record their objection to a penalty point as soon as it is incurred. They may have a valid ‘reasonable excuse’ meaning that no point should be charged. If, as we are recommending, they could enter an objection at that stage it would enable HMRC to consider withdrawing the penalty and also ensure that the reasons for the late filing are captured so that they can be fully considered if the points mount up and eventually trigger a monetary penalty.

“We are very concerned about the length of time that a penalty point can remain on a taxpayer’s record. For a taxpayer with an otherwise clean record to have a penalty point for a single late submission hanging over them for 24 months as HMRC proposes seems far too long. Allowing penalty points to build up over almost six years would be incredibly discouraging for taxpayers who were genuinely doing their best to cope with the new obligations which MTD will impose upon them.  

“HMRC repeatedly state that ‘the penalty regime should be designed from the customer perspective primarily to encourage compliance and prevent non-compliance. Penalties are not to be applied with the objective of raising revenues.’ We see our response to the consultation as being wholly supportive of those objectives.” 

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Notes for editors

1. HMRC’s consultation ran from 15 August to 7 November 2016. The consultation document can be found here.
2. The existing penalty provisions for failure to keep records are found in section 12B(5) of the Taxes Management Act 1970. They provide for a monetary penalty of up to £3,000 and have no provision for suspension. The provision is hardly ever used by HMRC but the new record-keeping obligations under MTD will need some sanction.  
3. Schedule 24 of Finance Act 2007 introduced an entirely novel concept in relation to penalties for careless inaccuracies. Either HMRC or the tax tribunal can suspend such a penalty –thereby giving the taxpayer the opportunity to take steps to avoid a repetition and not having to pay the penalty.
4. HMRC state in section 3.37 of the consultation document: “We are not proposing that customers should have the right to appeal against points as they arise.”