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HMRC announce a new penalty model to go with Making Tax Digital

HMRC announced earlier in 2017 that it was considering revising the penalty system for late submissions and payments to reflect the new system for VAT and self-assessment tax returns. The new system’s called Making Tax Digital (MTD), which will mean that small businesses, sole traders, and landlords will need to submit accounts digitally on a quarterly basis; and the same is to be introduced for VAT. A points-based model for late submissions, where points accumulate alongside penalties, which will be fully appealable, are set to be announced in draft legislation published in summer 2018.

HMRC announce a new penalty model to go with Making Tax Digital

This points-based penalty model proposes that late submissions under MTD will attract a point. Using a system a bit like the DVLA’s driving offence points system, the MTD new penalty model will accumulate on a scale up to a certain threshold, where a penalty will be charged for every failure to provide a submission on time. Then the system will reset to zero after a period of compliance.

Every business that an individual holds will be running a separate points system and be liable rather than the collective of businesses held by an individual accumulating under one account. Partnerships will acquire points and each partner will be held jointly and severally liable for any subsequent penalty.

Proposed penalty thresholds

Submission frequency Penalty threshold
Annual 2 points
Quarterly 4 points
Monthly 5 points

Proposed points reset periods

Submission frequency Good compliance period
Annual 2 submissions
Quarterly 4 submissions
Monthly 5 submissions

VAT first

In all likelihood the first tax the new model will affect will be VAT-reporting under MTD. Mandatory VAT reporting via MTD is set to being in April 2019 for all VAT registered businesses with turnover of £85,000. The new points system is planned to commence by 2020 when users have had a chance to acclimatise to the new system.

Which tax system next?

Probably all other taxes that demand regular submission will attract the same system. The current £100 penalty for late submissions of self-assessment will stop after an appropriate notice period.

How much will penalties be?

The fines and penalties tariff hasn’t be announced yet, but it’s possible that the tariff will include a fine for late submission plus a percentage of what’s owed and that the amount will increase in line with the number of points held by the business.

Rest assured that we’ll keep you posted as we learn more.

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