Earlier this year HMRC published a consultation paper seeking views on sanctions for late submission and late payment – Making Tax Digital – sanctions for late submission and late payment.
The proposals for late submission penalties have been developed with the new Making Tax Digital (MTD) obligations in mind. However, the consultation also explores the suitability of the sanctions for other regular submission obligations and proposes penalty interest as a sanction for late payment of Corporation Tax, Income Tax and VAT.
It’s the second consultation on the subject in less than six months, having previously been considered as part of the wider MTD consultation exercise that ran from August-November 2016.
The government has expressed its commitment to getting the late submission model right and therefore wants to undertake further consultation on its latest proposals – proposals that have been refined in light of the previous responses from organisations such as AAT as well as businesses and individuals.
Options for late submission
The consultation sets out three possible models for late submission penalties.
Model A is a points-based model based largely on what was proposed in the 2016 consultation but it applies to each tax separately rather than across taxes. This makes the proposed system a little less simplistic. Whilst AAT’s preference would be to see a single points total across all taxes, the immediate practicalities of doing so are challenging and AAT recognises and accepts this.
Under Model B, a compliance review, HMRC would carry out an automated review that looks at the customer’s compliance with their submission obligations after a set period of time and takes into consideration the number of failures when calculating the amount of any penalty. Again this review would be carried out tax by tax.
Model C is a suspended penalty system which gives the customer the opportunity to avoid having to pay a penalty by providing a late submission. When the first failure happens the customer would receive a notice advising them that they did not provide their submission on time and that they are therefore liable to a penalty – but that they would not be charged if they gave the outstanding submission within a specified time.
Taken in isolation each of these three models has advantages and disadvantages but when considering the three together it is clear that the consultation document has been written with the intention of promoting Model A as the preferred option.
Model B appears to be less simplistic than Model A.
Model C can be deemed more draconian than either model A or B.
In light of the above and in the interests of simplicity, fairness and effectiveness, AAT has recommended that the simple points based system (Model A) be adopted.
However, we have also made clear that there should be an ambition for this to eventually apply across all taxes as was originally suggested and as originally supported by AAT and others last year.
Irrespective of what model is chosen, AAT strongly believes that it would be sensible to review the operation of any new regime after a specified period of time, perhaps after all parties have on-boarded for MTD purposes, to establish what modifications could be made to make the system fairer, simpler and more effective.
Penalty interest – when?
The consultation document provides an update on penalty interest too. Although no specific questions are asked about penalty interest, the document does seek further views and AAT has willingly obliged.
AAT members have made their views on this issue very clear. When surveyed, less than 3.5% of AAT licensed accountants believed that 14 days after the due date is sufficient time to pay or to enter into time-to-pay arrangements.
Most AAT licensed accountants believe that 30 days is required (47%) which is of course the current length of time before which penalty interest can be charged.
This was very closely followed by 46% who believe customers should have 60 days or longer to pay.
In other words, whatever the time period is, it should be longer than that proposed.
HMRC has acknowledged that the vast majority of respondents to their 2016 consultation did not agree that 14 days was sufficient. A paltry one in ten respondents considered that it was.
Their summary of responses further highlighted that, “Many felt that the current equivalent timescale of 30 days would be more appropriate.”
AAT has argued that the decision to again consult on this issue in the apparent hope that a different result will be achieved undermines the very concept of an open and genuine consultation and rightly or wrongly leaves HMRC open to criticism and perpetuates cynicism.
30 days is widely accepted as a reasonable timeframe for payment in various other walks of life. For example, the Prompt Payment Code requires signatories to work towards making all payments within 30 days as the norm; if you pay Stamp Duty you must get your documents stamped by HMRC within 30 days or a penalty and interest is applied; landlords are required by legislation to protect their tenants deposits within 30 days or face punitive fines and of course individuals in receipt of tax credits are required to notify the tax credit office of any changes within 30 days or similarly will face the prospect of financial penalties. There are countless other examples.
In short, with over 95% of AAT licensed accountants believing that 14 days is not an appropriate length of time and with 90% of all MTD consultation respondents suggesting the same, it is completely unacceptable to press ahead with attempts to more than halve the existing 30-day period. We have again made this clear both in our consultation response and in personal meetings with HMRC officials.
Penalty interest – how much?
In a change of position, HMRC has suggested it would set penalty interest at 8% plus the Bank of England base rate.
Originally HMRC had proposed that the penalty rate of interest should fluctuate with changes to the Bank of England base rate. There was also mention of an arbitrary 10% figure being applied.
In 2016 AAT suggested that HMRC should introduce a fixed amount of interest plus the Bank of England base rate. This would replicate the system for late payments for businesses elsewhere – where the interest charged if one business is late paying another for goods or services means the business in question has to pay ‘statutory interest’ which is 8% plus the Bank of England base rate.
Statutory interest is a principle that has been around since the 1800’s and has worked reasonably well in practice. It applies to money claims taken before the courts by individuals and businesses and is used by various organisations e.g. the Financial Services Ombudsman, when calculating penalty interest for activities within their sphere of activity.
In the interests of simplicity, fairness and effectiveness, there is no reason why HMRC could not adopt the same, especially as AAT was first to make such a recommendation.
Phil Hall is AAT's Head of Public Affairs and Public Policy.