How to avoid HMRC's points-based penalty system

4 min read

HMRC has published details of the penalties system for late submissions and payments under Making Tax Digital. It confirms it plans to pursue a points-based model.

On the 13 December 2017 HMRC updated their consultation “Making Tax Digital – sanctions for late submission and late payment” with a summary of responses. The document sets out some further details of the proposed model, including:

  • the approach to Making Tax Digital obligations
  • a maximum lifetime for points
  • what happens to those that continually to fail to submit a return

The government plans to carry out a technical consultation on the draft legislation in summer 2018 and has published a consultation on simplified interest and late payment penalties, and it is intended to take forward both elements as a package.

In its report HMRC stated that a large majority of respondents favoured the points-based model due to its comparative simplicity, which was of chief importance.

“Penalty points will expire after a period of good compliance.”
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How the points system will work

HMRC outlined that customers would receive a point every time they fail to submit on time. Once a certain threshold is reached a penalty will be charged, which will be dependent on the frequency of their submission obligations. After the threshold has been reached, a penalty will be charged for every subsequent submission failure.

The penalty thresholds put forward are:

  • 2 points for annual submissions
  • 4 points for quarterly submissions
  • 5 points for monthly submissions
HMRC outlines points based penalty system

The lifespan of penalty points

Penalty points will have a shelf-life and would expire after a period of good compliance.

Periods of good compliance are outlined by HMRC as:

  • 2 submissions for annual submissions
  • 4 for quarterly
  • 6 for monthly
“Penalty points and actual penalties will be appealable.”
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Making an appeal

Penalty points and actual penalties will be appealable (largely automated as HMRC envisage these could be significant in number) giving taxpayers the option to claim a reasonable excuse for failing to meet a filing obligation.

HMRC state that a separate-points total per tax is preferred, rather than points total relating to all obligations. This is because it’s simpler and reflects business structure, where different departments may be responsible for different taxes.

We expect the new points based system to apply for accounting periods commencing April 2020, giving taxpayers and their agents 12 months to understand and apply the new system.

Want more help understanding Making Tax Digital and what it means for you? Visit our MTD Resource Centre.

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