Currently if you miss a tax return you can get a fine from HMRC. Missing your filing deadline for your Corporation Tax or Self Assessment normally gets you a £100 fine. The longer it takes you to get your tax return done the higher the fines go and you can easily rack up fines and penalties of £500 to £1000. At the moment self-employed people and small businesses generally only have to do 1 tax return a year but a lot of people miss the deadlines. The government’s new Making Tax Digital scheme is going to change this to 4 tax returns a year, each with their own deadlines that will have to be met.
Making Tax Digital is due to launch in April 2018 with most small businesses and self-employed people going on the scheme in April 2019. The government has not decided exactly how the Making Tax Digital fines will work, or how much they will be. They currently have three ideas. These are a points based system, a review based system and a suspended penalty system.
Making Tax Digital Fines – Points Based
This system would see a business or self-employed person get a point for each tax deadline they miss. As Making Tax Digital is going to cover Income Tax, VAT and Corporation Tax by 2020 this potentially means multiple deadlines throughout the year. When a business or individual has acquired three points they will start to get fines. The diagram that the government have provided to illustrate this system is below:
Making Tax Digital Fines – Review Based
This system would run depend on an ‘automated review’. The automated review would look at how many Income Tax, VAT and Corporation Tax deadlines have been missed and over what period. If the automated system decides that too many have been missed then a fine will be issued. Exactly when the automated review would happen is likely to depend on the exact combination of taxes that a small business or self-employed individual is registered for. The diagram that the government have provided to illustrate this system is below:
Making Tax Digital Fines – Suspended Sentence
This system will basically work in the same way as a suspended prison sentence. The idea is that if a deadline is missed a penalty will be issued straight away but it will be suspended for a set amount of time. If the self-employed individual or business then files their return within this time the penalty will be withdrawn, if they don’t then they will have to pay it. However, the amount of time that fines will be suspended for will depend on your overall compliance record. So if you are generally good at meeting deadlines you will get longer, if you are generally bad at meeting deadlines you may get fined more quickly. The diagram that the government have provided to illustrate this system is below:
Getting help from an accountant
As online accountants we know that many of our small business and self-employed clients rely on us to meet their tax deadlines. We have systems in place to regularly remind our online accountancy clients when deadlines are approaching so we have plenty of time to get the information we need and get the returns completed on time. However, all of the government’s information and calculations on Making Tax Digital assume that small businesses and self-employed people will not use an accountant and will do all of their tax returns themselves.
Around 4 million businesses and individuals are going to be moved onto Making Tax Digital by 2020. If all of these people follow the government advice and try to meet multiple tax returns a year themselves this is likely to result in a lot of missed deadlines. In 2016 870,000 self assessment tax returns were filed late. With 4 tax returns deadlines to hit per year rather than 1 the potential number of self-employed people and small businesses getting fines is huge. Given the complexity of some of the penalty systems the government is suggesting just administering the penalties for Making Tax Digital could become a massively expensive but is also likely to raise a lot of money for the government in fines.
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