HMRC set to introduce new fines for late payments: is the system fair?

HMRC’s proposed new penalty system isn’t fair and could end up punishing some small business owners disproportionately, tax experts have warned.

In a recent consultation on interest and late payment penalties, HMRC has proposed a new penalty model for those that need more time to pay their taxes.

HMRC says the aim of the proposal is to achieve ‘balance’ between being fair to those that pay on time and being flexible to those that need time to pay – without inadvertently creating a second payment date.

But The Association of Tax Technicians claims the suggested model is complex, and asks whether it will actually put people off from paying sooner.

What is HMRC’s proposed new system?

The suggested system is part of HMRC’s ‘making tax digital’ initiative, aimed at simplifying and standardising administration across taxes. It coincides with the introduction of the new points system for late tax returns, which is expected to be rolled out from April 2019.

HMRC’s proposal would introduce three brackets of penalty, depending on when the payment was made:

  • No penalty if payment (or a time to pay arrangement) is made within 15 days of the due date
  • A 2.5 per cent penalty of the tax outstanding if payment (or a time to pay arrangement) is made within days 16-30
  • A 5 per cent penalty of the tax outstanding if there’s no payment (or time to pay arrangement) from day 31

Experts criticise the proposed system

The Association of Tax Technicians (ATT) says that HMRC’s proposal offers a “carrot” for making payment or an arrangement within 15 days of the due date, rather than a “stick” for failing to make the payment in the first place.

The association says that it would be much simpler and more understandable to taxpayers if interest started to accrue immediately following the payment due date.

And with late payers slammed by a 2.5 per cent charge after just 15 days, the tax experts went on to suggest that this would likely lead to many appeals – especially in cases where the outstanding tax is considerable.

Yvette Nunn, co-chair of ATT’s technical steering group, said: “The single 2.5 per cent charge incurred at day 16 also provides no additional incentive to pay before day 30.”

Is there a fairer way?

The Association of Tax Technicians would have interest accruing from the due date, with the penalty evaporating if payment or a time to pay arrangement was made in the first 15 days.

They believe that this would avoid disproportionate penalties, meaning someone who paid on day 16 would incur a lighter interest charge than someone who paid on day 29.

They say that late payers would also have more incentive to pay as soon as possible, as interest would be added to the penalty amount daily.

The consultation closed for comments on 2 March, so we expect further details soon.

What do you think about HMRC’s new proposal for late payers? Let us know in the comments below.

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