We’ve commented several times in this brief about some of the problems with the existing penalty regime for late filing and late payment of tax. Nobody seriously doubts that there has to be some sort of sanction where people don’t meet their obligations, but designing a system which is fair both to those who do file or pay late and to those who do everything on time has been remarkably difficult.
This is classic carrot and stick territory. The system needs to punish those who transgress but also encourage them to mend their ways. It also needs to set sanctions at the right level.
A purely nominal penalty has no deterrent effect, but a penalty which is out of all proportion to the ‘offence’ risks alienating people who simply need a gentle reminder to pull their socks up.
The current regime, where the penalties for not filing an income tax return can mount up to £1,600 even if there is no tax to pay, is widely seen as unfair.
The government has recognised for some time the need for reform and the introduction of the new processes under making tax digital have been a catalyst for a review.
HMRC has been consulting on penalties for some time and has now announced that it will introduce a points-based system, a little like that for minor motoring offences, under which each failure to file will incur a penalty point, but where a penalty will only be due once a certain level of points has been accumulated.
This approach was recommended by a large proportion of those who responded to the consultation and in principle does appear to be a major improvement on what we have at present. The next step in the process will be the publication of detailed rules, expected next summer.
We will be looking out for two key aspects. The first is what happens where an individual incurs penalty points but has no tax liability. There is a case for a small penalty in these circumstances but we are hoping that action will be taken to remove the very high penalties which can arise at present. The second is the way in which taxpayers are made aware of the fact that penalty points are building up. Under some of the existing rules taxpayers don’t become aware that penalties are building up until it is too late to do anything.
Change won’t come for some time – 2020 at the earliest. It is frustrating that we will have to wait so long, but on the other hand it does give time to get the details right. Well, we can live in hope…
For more information, please comment below or get in touch with Andrew Hubbard.