HMRC delays late payments penalty reforms

Planned reforms to HMRC’s penalty regimes for late submission and payment of tax due are to be further delayed while the department considers how best to communicate the changes, with papers published following the Budget indicating there are unlikely to be any change before April 2021 at the earliest

The new penalty regimes for late payments of tax and late submissions of tax returns were originally expected to be introduced alongside Making Tax Digital for income tax from its original start date of April 2018 and would have affected a very large number of taxpayers.

Deferral of Making Tax Digital for income tax meant there was more time to refine the new penalty regime, which had attracted considerable criticism, but it still was not expected to be ready for the new deadline for Making Tax Digital for VAT, which is April 2019 and was predicted to commence from April 2020.

Now the Budget papers confirm that while the regime has been subject to consultation, it will not be implemented in the timescale originally foreseen.

The Overview of Tax Legislation and Rates (OOTLAR) document states: ‘The government consulted in summer 2018 on draft legislation for new late payment and late submission sanctions.

The government remains committed to the reform and intends to legislate in a future Finance Bill, to allow for more time to consider further the communications needed for successful implementation. ‘The government will provide notice before these measures are implemented.’

The Budget announcement means that the new regime will not now be in place until April 2021 at the earliest.

John Cullinane, CIOT tax policy director, said: ‘We are broadly supportive of these reforms to HMRC’s penalties regimes, so we are disappointed by this further delay, though as with any reform, we acknowledge that it is more important to do it right than to do it quickly.

‘If HMRC say they need until April 2021 – or later - to implement these changes then we will take them at their word and make the best use of the extra time to work with them on the details of the new regimes and publicity around their introduction.’

HMRC has indicated that it wants to introduce a two-tier penalty system which would kick in 15 days after a late payment.

Penalties will be calculated on debts remaining due after 15 days from the payment due date although on a mitigated basis where payment is made or a Time to Pay arrangements (TTP) has been set up until 30 days after the due date.

Where a successful TTP agreement is made, the government will take the date of contact with HMRC as the effective date for the purpose of late payment penalties.

If a payment or TTP is made or treated as made within 15 days of the due date no penalty will be charged; between 16 and 30 days half a penalty will be charged; and after 30 days a full penalty will be charged plus a further penalty which will then accrue daily until payment is made or a TTP treated as made.

Cullinane pointed out the penalty regime will now not be in place until at least two years after Making Tax Digital becomes mandatory for VAT, meaning the VAT default surcharge regime will remain in place for 2019/20, and may well also continue for at least 2020/21 and maybe even beyond that.

‘The existing penalty regime for VAT is not well suited to Making Tax Digital, and we are concerned around the complexities and administrative burdens that will result. The penalty point model being proposed for late submissions will work better with the Making Tax Digital reporting system.

‘With Making Tax Digital for income tax not coming in before April 2020 at the earliest, it would make more sense now, given that there is this delay, for the new penalty regime to be brought in at the same time for all taxes. 

‘We hope HMRC will take the opportunity to do this. It is nonetheless disappointing that there has been a failure to deliver these changes effectively from the outset,’ he said.

Report by Pat Sweet

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