ICAEW TAX REPRESENTATION 68/17 Making Tax Digital: sanctions for late submission and late payment ICAEW welcomes the opportunity to comment on the Making Tax Digital: sanctions for late submission and late payment published by HM Revenue & Customs on 20 March 2017. This response of 9 June 2017 has been prepared on behalf of ICAEW by the Tax Faculty. Internationally recognised as a source of expertise, the Faculty is a leading authority on taxation. It is responsible for making submissions to tax authorities on behalf of ICAEW and does this with support from over 130 volunteers, many of whom are well-known names in the tax world. We attended a meeting with the relevant HMRC and HM Treasury staff to discuss these provisions. We should be happy to discuss any aspect of our comments and to take part in all further consultations on this area. Appendix 1 sets out the ICAEW Tax Faculty s Ten Tenets for a Better Tax System, by which we benchmark proposals for changes to the tax system. Contents Key points General comments Paragraphs 1-4 5-12 Responses to specific questions 13-37 Ten Tenets for a Better Tax System Appendix 1 The Institute of Chartered Accountants in England and Wales Chartered Accountants Hall Moorgate Place London EC2R 6EA UK T +44 (0)20 7920 8100 F +44 (0)20 7920 0547 icaew.com
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Key Points 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. Making Tax Digital (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 2 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. General Comments 5. We welcome the fact that the three possible models are designed to operate for each tax regime separately at this stage, with a model that would work across tax regimes being an ambition for the future. 6. We are very concerned that, because there are separate MTD income tax obligations for each separate trade and/or property business, points and penalties could be incurred separately for each of these sources of income, multiplying up the risk of incurring penalties. The penalty regime could hit those with secondary incomes particularly hard. 7. We understand that the intention is that late submission penalties for partnership income tax obligations will be charged at the partnership level rather than to each individual partner; this would be a positive change. 8. We welcome the government s confirmation that there will be a 12 month soft landing with no penalties in the first 12 months of a business having MTD obligations. Taxpayers will not complete a full annual cycle of reporting under MTD until their End of Year Report (usually 10 months after the end of the accounting period) and final declaration (usually 31 January after the end of the tax year) have been filed. We suggest that a 24 month soft landing would be more appropriate as it would allow taxpayers to complete a full annual reporting cycle before being at risk of incurring penalties. 9. The issue of how failure to notify penalties interact with late submission penalties is still to be addressed by the government and HMRC. The current system does not charge both (provided that the return is filed within 3 months of its eventual date of issue). 3
10. We note that the new penalty regime is being designed with a view to encouraging compliance. There does not appear to have been much consideration given to how the regime will impact on those who build up outstanding obligations or who have submission obligations that have remained outstanding for some considerable time. We understand that HMRC accepts that such taxpayers require a different approach the taxpayers concerned will include those who are deliberately non-complaint, those who do not understand their obligations and those who have not made submissions due to personal difficulties. We would welcome further consideration of how the penalty regime would impact on such cases and HMRC s intended approach. 11. We have primarily considered how the penalty regime would operate for Income Tax. Consideration needs to be given to how the regime will work for VAT and corporation tax once we know more about the MTD obligations for those taxes. 12. The consultation document does not mention how the penalty models would affect individual taxpayers who are in MTD for individuals rather than MTD for business eg, those who will pay tax by way of a simple assessment or who have a non-business capital gain to report. We suggest that further consideration be given to MTD for individuals before legislation is introduced. Responses to Specific Questions Question 2.1 Which of the three penalty models proposed (A - Points-based, B - Regular review of compliance, or C Suspension of penalties) do you consider to be the best and why? 13. Model A - Points-based is probably the base case and we welcome the improvements that have been made since the design described in the August 2016 consultation document. The fact that penalties would apply separately for each tax and not across all taxes is welcome, as is the proposal that it would be possible to appeal penalty points as they are incurred which would prevent issues caused by loss of information between the time a point was incurred and when it resulted in a penalty being charged. 14. Model B Regular review of compliance is not considered to be a good option, as the penalties could be charged a long time after the default and come as a surprise to the taxpayer. As such, they would lack effectiveness as a preventative measure and fail to promote future compliance. The penalty and the failure(s) to which it relates would not be sufficiently closely connected in the mind of the taxpayer (or the later penalty would simply cause resentment) and the model would not be easily understood by taxpayers. 15. Model C Suspension of penalties does offer interesting possibilities and with further development might prove to be the best option. It also supports HMRC s statement that it wants to help businesses get their tax right first time and to prevent them from feeling punished for making honest mistakes, para 2.2. We suggest that it might be possible to combine some of the suspension elements of Model C into Model A (or vice versa). Question 2.2 What are your views on the relative importance of the competing demands of fairness, simplicity and effectiveness? 16. It is difficult to separate these competing demands. Fairness is important in supporting voluntary compliance; the UK has a good record of voluntary compliance and a penalty system that is seen as disproportionately harsh could undermine this. It is challenging to design a regime with fixed penalties that is regarded as truly fair by taxpayers if penalties are charged when no tax is due. Fixed penalties do not readily take sufficient account of the size of the taxpayer, the magnitude of the error and the ability to pay. Therefore, the amounts of the penalties will need to be set very carefully. 17. With regard to simplicity, we think it is unlikely that any of the models will be seen as simple by taxpayers, but most will do their best to meet the submission deadlines and only begin to understand the penalty regime if they fail to do so. Nevertheless, general awareness of there being penalties is obviously important and agents can use them to encourage compliance. The fact that there will be more frequent submission obligations under MTD militates against a simple penalty system. 4
18. Effectiveness will presumably be measured by the extent to which compliance improves although we note that because the underlying obligations are changing so significantly, there will not be a baseline against which this can be measured easily. 19. An important part of effectiveness is warning the taxpayer that they will incur a penalty if they do not comply; no one wants to be charged a penalty. Suspending penalties with conditions gives a strong message that HMRC wants the taxpayer to change their behaviour and is not simply looking for an excuse to extract more money. Notifying the taxpayer each time they incur a point, and warning them of the consequences of a further breach, gives a similar but slightly weaker message. The warning needs to be effective - noting it on the taxpayer s digital tax account is unlikely to achieve the desired effect. A letter would be the most effective method given that the failure is of a digital obligation. An email or a text would also be effective for some people, but by no means all. 20. Overall, where there is a choice to be made, we suggest that HMRC prioritises fairness as voluntary compliance is too important to risk undermining. Simplicity is going to be very difficult to achieve. Effectiveness will be closely linked to other aspects of MTD such as the ease of use of the system and the support available which will be equally important in encouraging compliance. Question 2.3 To what extent does each of the three penalty models strike an appropriate balance between fairness, simplicity and effectiveness? 21. The models differ in potential effectiveness more than fairness and simplicity. We consider that a model incorporating elements of the points-based and suspension models is likely to strike the best balance and we discount the regular review of compliance model which we consider is unlikely to be effective or seen as fair. The suspension model provides a strong incentive for the taxpayer to rectify the failure to submit within a short period of time; the points-based model has the benefit of not penalising the first default which is lacking in the suspension model. Question 3.1 Do you agree with these proposals for the duration of the required good compliance periods? 22. The proposals for the duration of the required good compliance periods seem reasonable. The rules would need to cater for taxpayers who move between the categories eg, a taxpayer whose turnover increases and who starts to have quarterly MTDfB obligations. We suggest that the ambition for a model across tax regimes be borne in mind, given the different submission frequencies for different taxes. For artificial persons (companies, trusts, etc) it might be appropriate to reset the points where there is a change of control. Question 3.2 Could any changes be made to the points-based penalty model to make it fairer, simpler or more effective? 23. We wonder whether it might be possible to build in some elements of the suspension model - one of the attractions of that model is that it encourages taxpayers to meet the submission obligation within a period of time after the default whereas the points-based model is more black and white as a penalty point is incurred however late the submission. We welcome the proposal that penalty points would be appealable but a better alternative might be that they could be suspended if the submission is made with a short period. Question 4.1 What are your views on the timing of the review? 24. We do not favour Model B because a penalty might be charged some time after the failure(s) to which it relates, undermining the effectiveness of the penalty. This model would be incomprehensible to most taxpayers. Therefore, we do not express an opinion on the timing of the review under this model. Question 4.2 Which of the three options mentioned in paragraphs 4.5 to 4.7 above for customers within Making Tax Digital for Business do you think is the most appropriate? 5
25. We do not favour Model B because a penalty might be charged some time after the failure(s) to which it relates, undermining the effectiveness of the penalty. Therefore, we do not express an opinion on the three options in paragraphs 4.5 to 4.7. Question 4.3 Do you agree this would be a proportionate response to occasional lateness that lasted just a short time? 26. We do not favour Model B because a penalty might be charged some time after the failure(s) to which it relates, undermining the effectiveness of the penalty. Therefore, we do not express an opinion on whether the proposed response to occasional lateness is proportionate beyond noting that it does not fit well with annual submission obligations. Question 4.4 Could any changes be made to the regular review of compliance model to make it fairer, simpler or more effective? 27. We have no further comments to make on Model B. Question 5.1 Do you agree that improved compliance should be recognised? Is there a better alternative for recognising it? 28. We agree that improved compliance should be recognised and that an element of wiping the slate clean again after a period could help to encourage this. Question 5.2 Could any changes be made to the suspension model to make it fairer, simpler or more effective? 29. The suspension model might be made more effective if there were no penalty for the first default. We suggest that consideration be given to there being a mechanism for taxpayers or their agents to tell HMRC in advance if a submission deadline will not be met and to agree a revised filing deadline to take into account particular issues such as ill health etc, with a penalty not being charged if an agreed later deadline is met. We suggest that the suspension model be developed further, possibly incorporating elements of the points-based model (or vice-versa) to explore whether there is a more effective model. We suggest that consideration be given to making education a condition of suspension (the equivalent of a driver speed awareness course). Comments on Penalty Interest 30. We suggest that penalty interest be renamed - something like unpaid tax penalty. Even though it is intended that the charge would be calculated in a way that is similar to an interest charge this does not make it interest the description needs to make it clear that it is a penalty and not interest. It has been evident from questions on our MTD webinars that the use of the word interest in this context causes confusion even though there was general agreement with the approach once it was fully explained. 31. Members have reported significant concerns about HMRC systems allocating payments incorrectly. This particularly applies to payments of PAYE and National Insurance by employers, where duplicate and other erroneous charges are also an issue, but also to other taxes. This can result in interest being charged when, overall, there are no amounts due to HMRC. We recommend that HMRC addresses the issues with allocation of payments and other processing issues before introducing penalty interest. 32. Where there are several debts a debtor is entitled to allocate a payment at the time of payment. Paying the exact amount of a specific debt constitutes allocation to that debt. If the debtor does not allocate the payment, the creditor can do so. If neither allocates, the payment is set against the earliest debt. Unfortunately HMRC systems seem to ignore steps one and two and allocate every payment against the earliest debt even when the payment is clearly intended to be allocated against a later one. Where a person pays their tax by the due date the earliest debt is generally interest on the previous payment. Currently, most taxpayers grit their teeth and put up with the misallocation, but very few people are going to put up with having to pay penalty interest solely because HMRC has misallocated the payment of a specific debt. 6
33. HMRC statements (paper and online) do not make it clear how payments have been allocated and are extremely difficult to follow. There is considerable scope for improvement in how payment and liability information is displayed online and in paper statements. 34. Consideration must be given to the transition as the new system is being implemented. Statements containing liabilities, payments, penalties and interest charges under both the old and new systems will be almost impossible to understand. 35. Checking interest charges is currently very difficult, particularly for unrepresented taxpayers, as interest is not added to tax accounts at regular intervals and HMRC online systems and documents are not currently designed to give clarity on interest charges. There is considerable scope for HMRC to use digital tax accounts to make these charges more transparent ie, for it to be possible for taxpayers and their agents to drill down to obtain the full details of how the interest charge has been calculated. We suggest that HMRC explores options to make it much easier for taxpayers and their agents to check interest charges. 36. We are strongly of the view that 14 days is a wholly inadequate period in which to agree time to pay. As well as the personal and administrative factors mentioned in the consultation document, the taxpayer may need time to arrange financing or to negotiate the arrangement with HMRC. There could be an impact on HMRC workloads if agreements have to made within such a short period. We are not aware of any evidence that taxpayers abuse the current 30 day period before income tax self assessment late payment penalties are charged and there would appear to be no good reason for this period to be shortened 37. We suggest that the model should provide a continuing incentive to agree time to pay beyond the initial period after the tax becomes due. Suspension of further penalty interest charges whenever a time to pay arrangement is in place would provide such an incentive. 7
APPENDIX 1 ICAEW TAX FACULTY S TEN TENETS FOR A BETTER TAX SYSTEM The tax system should be: 1. Statutory: tax legislation should be enacted by statute and subject to proper democratic scrutiny by Parliament. 2. Certain: in virtually all circumstances the application of the tax rules should be certain. It should not normally be necessary for anyone to resort to the courts in order to resolve how the rules operate in relation to his or her tax affairs. 3. Simple: the tax rules should aim to be simple, understandable and clear in their objectives. 4. Easy to collect and to calculate: a person s tax liability should be easy to calculate and straightforward and cheap to collect. 5. Properly targeted: when anti-avoidance legislation is passed, due regard should be had to maintaining the simplicity and certainty of the tax system by targeting it to close specific loopholes. 6. Constant: Changes to the underlying rules should be kept to a minimum. There should be a justifiable economic and/or social basis for any change to the tax rules and this justification should be made public and the underlying policy made clear. 7. Subject to proper consultation: other than in exceptional circumstances, the Government should allow adequate time for both the drafting of tax legislation and full consultation on it. 8. Regularly reviewed: the tax rules should be subject to a regular public review to determine their continuing relevance and whether their original justification has been realised. If a tax rule is no longer relevant, then it should be repealed. 9. Fair and reasonable: the revenue authorities have a duty to exercise their powers reasonably. There should be a right of appeal to an independent tribunal against all their decisions. 10. Competitive: tax rules and rates should be framed so as to encourage investment, capital and trade in and with the UK. These are explained in more detail in our discussion document published in October 1999 as TAXGUIDE 4/99 (see http://www.icaew.com/-/media/corporate/files/technical/tax/taxnews/taxguides/taxguide-0499.ashx). 8