Making Tax Digital: Tax Administration
28 February 2017
One of the six Making Tax Digital (MTD) consultations published in 2016 sought views on how to adapt existing tax administration powers to support the introduction of MTD.
Tax administration legislation governs the way in which HMRC interacts with its customers. This includes tax returns, assessments, claims, data gathering, payment, compliance, interest, penalties, information powers, appeals and time limits.
The consultation and response were set out into chapters; a summary of the proposals and government responses follows:
Checking a customer’s tax position – compliance powers
The consultation set out proposals about how HMRC’s compliance powers should work so that the ability to check a customer’s tax position in a digital world is retained. As MTD will apply to businesses within scope of Income Tax from April 2018, HMRC’s powers will need to be adapted to fit with the MTD processes in time for this.
The government’s intention is to replicate HMRC’s current enquiry powers. The consultation document proposed that existing legislation should be amended to allow HMRC to enquire into the End of Year declaration in order to check the tax position of a customer. Customers’ safeguards, which protect customers’ rights, will be maintained under MTD. This includes the right for customers to request a review or appeal against HMRC decisions as well as time limits for HMRC to be able to enquire into a customer’s tax position.
The government does not intend HMRC to enquire in-year into regular updates. As a result of the new MTD obligations, where a customer completes an End of Year declaration and has non-business income submitted in a Self-Assessment tax return, there will only be one enquiry window which will commence when all relevant information has been received and is confirmed by the customer to be complete and correct. Legislation will be included in Finance Bill 2017 that will adapt existing Income Tax compliance powers to fit with MTD processes in time for the introduction of MTD for Income Tax in April 2018.
Late submission penalties
The consultation proposed a new approach to late submission penalties, in line with the widely supported principles set out in HMRC Penalties: a Discussion Document. Instead of applying penalties to each failure, it proposed a more gradual model whereby each failure would attract penalty points. Only once the points reach a set level would a penalty be charged. The government also proposed that customers who are within the scope of new submission obligations being introduced by MTD should have a period to gain familiarity with the new system before the new penalty regime comes into effect.
In designing the penalties system, the government is trying to balance several competing objectives. The system needs to be both fair and easy to understand whilst also ensuring it actively promotes the right behaviours and actions. The government recognises that there will sometimes be tension between these objectives, and as such the government may have to prioritise different objectives. The government is committed to designing a system that works for customers and HMRC and as such, will look again at sanctions for late submission. They intend to publish a further consultation document in spring 2017 with a view to introducing legislation at the next appropriate legislative opportunity. In order to support customers during the transition to the new MTD obligations, customers will be given a period of at least 12 months before they will be charged late submission penalties under MTD.
Late payment sanctions
This chapter set out two proposals to change late payment sanctions:
Proposal A: penalty interest: Charging penalty interest on customers who, within 14 days of the due date, fail to pay in full or to enter into arrangements to pay over an agreed period to which they then adhere
Proposal B: revise and align existing late payment penalty regimes: Revision of existing legislation to deliver an aligned penalty regime for Income Tax, VAT and Corporation Tax.
(Proposal A), emerged as the most attractive option to respondents and the government will continue to explore this option, taking into account concerns raised, particularly about the rate levels and the interaction with the current interest provisions. The government intend to consult further on specific proposals in 2017.
The consultation asked for views on maintaining existing late payment interest rules for the purposes of Income Tax and Class 4 National Insurance Contributions (NICs). It also asked for views on the possible alignment of interest rules across Income Tax and Class 4 NICs, Corporation Tax and VAT.
The government response states that it will maintain the current interest rules for Income Tax and Class 4 NICs and intends to consult on specific proposals to align interest across Income Tax and Class 4 NICs, Corporation Tax and
VAT in 2017.
Further details can be found in the government's full consultation response document.