Don't penalise MTD's first latecomers, HMRC told

Limited company owners and others who work for themselves should be allowed to default a number of times under Making Tax Digital before incurring a penalty.

Issuing this recommendation, a chartered tax body said submitting or reporting late with MTD should result in nothing more than a ‘short extension period’ so the taxpayer can have extra time to comply.

So far however, HMRC has said it is looking at a ‘fixed penalty’, irrespective of size of business, rather than a ‘cumulative suspension’ penalty, which is what the body -- the CIOT -- says is needed.

Such a penalty reflects HMRC’s principles for penalty-making (fines should be designed with the taxpayer in mind and encourage compliance), and would actually hit those deliberately flouting the system.

The Chartered Institute of Taxation (CIOT) also said the MTD penalties would ideally be “visible” to taxpayers and should be simple, but must not “accumulate without the taxpayer becoming aware of them.”

The institute’s Adrian Rudd appealed to HMRC: “The policy intention[s] behind them are [ideally going to be] easily understandable to the ordinary taxpayer, and there must be a straightforward right of appeal against the imposition of a penalty.”

If it wants an existing model as an example, the Revenue was pointed in the direction of how it introduced Real-Time Information to small traders in 2013, by granting a three-year penalty amnesty.

“[MTD] will present significant technological and logistical challenges to the many small businesses and landlords which are not currently maintaining digital records or interacting with HMRC on a frequent basis,” Rudd said.

“It is important that the penalty sanctions for the new regime reflect this, particularly in the early years.”

Making Tax Digital was omitted from Finance Bill 2017, but it is still scheduled by the government to be introduced gradually, starting in 2018 with Income Tax for businesses, landlords and the self-employed.

Although individuals within these groups whose annual turnover is below the VAT threshold (£85,000 and above) will not be affected from 2018, MTD will extend in 2019-20 for income tax purposes to “all” businesses, landlords and self-employed people with annual turnover above £10,000. It will then move on to VAT (2019) and Corporation Tax (2020).

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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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