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Two-tier Making Tax Digital penalty regime confirmed

The penalty system for Making Tax Digital will kick in within 15 days of an overdue payment and will be a two-tier system, the government has confirmed in the draft Finance Bill 2018-19, although there will be an initial grace period for late filers

The government has admitted that there were numerous complaints in the consultation responses stating that the system for Making Tax Digital penalties was overly complicated with effectively a two-tier system, but it will go ahead regardless.

HMRC has confirmed that the penalties for failure to keep digital records will come into force immediately from April 2019, while there will be a grace period for those who file late. Penalties for late filing will come into force in April 2020.

Making Tax Digital for VAT reporting for business is due to come into force from April 2019, although the wider project for corporation tax and property tax has been delayed until at least 2020-21.

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.

The government intends to introduce the late payment penalties based upon the two charge model consulted on as it believes that a two charge system is fairer to the vast majority who comply with payment dates and prompts better compliance behaviours for the small minority who do not in a proportionate manner:

It says that the system will encourage taxpayers to get in touch earlier with HMRC when they have payment problems and will directly link the penalty to the amount of time a debt is outstanding.

Two-charge model

Two charge model will work as follows:

  • 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;
  • 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.

VAT repayment interest

Some specific concerns were raised about VAT repayment interest not being paid where there are missing returns or for periods of reasonable enquiry.

In response, the government has decided that where a repayment return is received and there are other outstanding returns HMRC will pay interest from the date any outstanding returns are submitted, subject to reasonable enquiry.

The government rejected concerns about using differential rates for corporation tax Quarterly Instalment Payments (QIPS), stating that only those paying corporation tax have to estimate their current year’s tax liability before the year is finalised and make payments based on those estimations.

Once the payment date for the year, nine months and one day after the end of the accounting period has elapsed, the usual rates apply. As a result, there will be no change to the current interest rate differential for QIPS, the government confirmed.

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