MTD penalties consultation – ICAEW responds

ICAEW has responded to the consultation Making Tax Digital: sanctions for late submission and late payment.


The proposals in this consultation, published on 20 March 2017, are intended to update the penalty regime for late submission of returns and late payment of tax to take account of MTD reporting requirements. It sets out three possible models for late submission penalties and also proposes that penalty interest would apply to late payments.


The proposals build on the MTD: Tax Administration consultation issued in August 2016, to which ICAEW responded in November 2016, and the government response published in January 2017.


Our response is in ICAEW REP 68/17. We say that any changes to the penalty rules should only be made after very careful consideration, and that introduction of new rules should be delayed until MTD is up and running. Of the three possible penalty models proposed, we recommend a points-based system which also includes the option for penalties to be suspended.


The key points highlighted by ICAEW are:


1. ICAEW is in agreement with the principles underpinning penalties which were outlined in the August 2016 consultation document. We suggest that careful consideration be given to the context in which changes to late submission and payment penalties are being introduced. MTD will increase the frequency of submissions to HMRC and radically alter the current familiar timetable. The 31 January filing deadline and the £100 penalty for missing it are well understood; the changes to the penalty regime effective from 2010/11 took a long time to be generally understood and still cause some confusion. HMRC benefits from a considerable amount of free media coverage reminding taxpayers of the deadline each year. We suggest that further thought be given to the deadlines and related penalties as we cannot at the moment see how they could be encapsulated in a simple communication that would have the same impact as currently.


2. Although it is usual for penalty legislation to be introduced to apply from the same date as the associated obligation we suggest that consideration be given to delaying the penalty legislation until at least Finance Bill 2019. We suggest that the new penalty regime should apply from April 2019 or later and that there should then be a soft landing period of two years. This would allow time for the penalty regime to be developed based on experience from the pilot. The current self assessment late filing penalties could be applied to the final declaration under MTD in the interim.


3. We consider that the points-based system is the right starting point but that an element of suspension should be built into the model. Analogies with the system for points on driving licences have been drawn but what is lacking in the points-based model for submission penalties is a sufficiently strong warning and an education element (eg, the equivalent to a course instead of points). The extent to which taxpayers will not understand their obligations in the early years of MTD (and in the early years of trading if the business commences once MTD is operational) is, we believe, being underestimated. Allowing for suspension once a penalty is charged, subject to a condition that the submission is made within a certain period, would promote compliance. We would support HMRC being given more power to suspend or waive penalties; the current regime is too tied to the reasonable belief test being the only way in which a penalty can be cancelled.


4. The government has not yet given any indication of the level at which fixed penalties would be set. Therefore, it is not possible to assess whether the penalties would be seen as proportionate. We consider that penalties will not be seen as proportionate if they are not capped at the amount of tax payable.

  • I agree with most of the comments already made. I am in the middle of appealing against a penalty for the late submission of a corporation tax return for the year ended 28 February 2016 where hmrc have stated that the return has not been filed - which is "backed up" by  the Gateway account.  Fortunately not only do I have an e-mail receipt for successful filing but a paper copy of the agreed hmrc "tax calculation" and its subsequent payment (one of the last to be issued on paper by hmrc ). Not only are clients going to have to invest time and money in software they are going to have use but they are going to have to check up on the hmrc side of the data exchange via their Gateway account on a regular basis and keep copies as in experience tax accounts can be changed with no audit trail on the hmrc side - very frightening!

  • Have people considered that HMRC is relying on the penalties to boost the tax take? There's no way that they will back down easily. The Institutes have given HMRC a soft ride and will now find they face an intransigent enforcing body. Time for letters to local MPs?

  • If the MTD will be a pain for small businesses and charities toas a non resident renting out his family homethis is going to be nothing if not a trail. My crystal ball sees penalties looming!

  • I am increasingly finding that staff at HMRC don't understand their own system. Many of their calculations are wrong for 2016-17. HMRC haven't sorted this yet. HMRC staff I have spoken to (several)  are unaware of this issue. HMRC are telling us MTD is to help us get it right and that we are not getting it right.  I filed returns on 31 January, gained receipts from HMRC, but eventually found after irate demands for tax not due were sent out to clients, that the efiled returns  had not stuck in HMRC's system. HMRC have apologised but can't explain why this error occurred.

    75% of me thinks the whole premise of quarterly updates is misplaced.  We are going to need a long soft landing; several years until it is bedded down and proving worthwhile and HMRC are also getting it right. What happens if you can't get into your gateway account because your mobile with the security text has been stolen, dropped in water etc etc. There are so many what ifs.  There are penalties for non submission, but how are they going to view getting returns sorry updates  wrong? Non accountants are not always good at judging whether figures are approximately right and  reasonable (accountants may not be so good either). They will be under the 30 day time pressure and only have a week or so to get it right

    (rember holidays business pressures customer first etc), many will panic. It seems to me that what is filed with HMRC has to be an estimate in the sense of provisions for bad debts etc. Much more important that the income is fully declared than the expenses being wrong. If income is being omitted, it seems more serious than expenditure not being right - not sure about that. We don't know all the difficulties people are going to encounter. Half of me thinks MTD should be optional for several years, unless a taxpayer is defaulting in some way, until it is tried and tested. That will take a few years.  I would suggest HMRC staff are nowhere near ready and do not have the capacity for what will be mayhem in the first few years. I expect public anger and mistrust. I am not trying to endlessly criticise HMRC,  many especially the experts I find helpful. This is a huge change for everyone! Slowly and surely in small steps does it -no big wallops please! Hence the optional feature and more time to adapt.

  • I still cannot see how small traders will cope with MTD.  Any early penalty regime will produce a tide of public anger followed by a rapid u-turn by HMRC.  Better to get the public used to MTD reporting first and then chase those not even trying.....