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The idea of introducing points-based changes to the penalty system was first announced at Autumn Budget 2017.
Subsequently, a consultation was launched by HMRC to explore potential changes to the penalty system. This was in tandem with the launch of Making Tax Digital (MTD).
The government has now decided to adopt a new points based penalty system. This was confirmed with the publication of the Finance Bill 2018-19 draft legislation. The Bill includes new measures to introduce a points-based penalty system for certain regular (e.g. monthly, quarterly and annual) returns that are filed late.
The new rules are intended to more heavily penalise repeated offenders who continue to miss deadlines. Those who make a one-off late filing or penalty will be treated more leniently and may not receive any penalty.
The changes will initially apply only to regular VAT and Income Tax self-assessment obligations. Corporation Tax late filing penalties are not included within the scope of the current proposed legislation. However, it is the government's intention to extend the new points-based penalty system to the Corporation Tax regime in due course.
Using an MTD ready software like Xero will reduce the likelihood of penalties since it is already compliant and quick to implement. For larger retail companies we do also recommend Sage200 for stock integration in one system.
The government plans to roll-out the implementation of the new regime starting with VAT filing obligations from 1 April 2020. This means that there will be a 12 month ‘soft landing’ period after MTD for VAT is introduced in April 2019 before the new points system is rolled out. No timetable has yet been announced in relation to the introduction of the new penalties regime for Income Tax self-assessment.
Points and Penalties
Under the new system, a defined number of penalty points will be given where a regular tax filing is made late. The amount of penalty points will depend on several factors. When a taxpayer is given penalty points this will not mean an automatic penalty will be levied.
A penalty will only be levied when a pre-defined points threshold has been reached. The fixed penalty is likely to be set at a higher rate than current penalties to reflect this change. However, for the time being the available information is quite scant, and no actual penalty rates have been published.
Points will generally expire after 24 months, meaning that if a taxpayer accrues points but does not reach a penalty threshold (by having a period of good compliance) then the points will expire. There will also be a new process under which penalties and points can be appealed and reviewed including the ability to seek a review or to lodge a Tribunal appeal.
Want to know more about how this may affect your business? contact us today.