Small businesses face new punitive penalty regime

New rules introduced as part of the government’s Making Tax Digital proposals could see fines for late tax payments triple.

Currently small businesses face a fine worth five per cent of their outstanding tax bill if they pay late. This is charged at 30 days, six months and then again at 12 months, slowly accumulating at a slow rate if the tax remains unpaid.

However, buried within the Making Tax Digital consultation papers is a new penalty system that will see HM Revenue & Customs introduce a sliding scale that could see the initial penalty charge quickly increase to 15 per cent – a 200 per cent rise when compared to the current fine regime.

The new fines would affect failure to pay income tax, national insurance, corporation tax and VAT. The document makes it clear that the 15 per cent figure is purely ‘indicative’ and may not in the end be the level of the final fine.

As part of the shake-up of penalties, the rules for late filing of tax returns and information will also change to reflect the changing nature of reporting tax on a quarterly basis.

At the moment businesses receive an automatic flat-rate fine of £100 for missing the deadline, even if this is just by a day. This is followed by additional fines the later the tax return is submitted.

The new proposal is for a ‘penalty point’ scheme where only repeat offenders receive a fine. Under the plans, the points will be ‘reset to zero’ only after two years in which all information has been submitted on time.

Anita Monteith, a tax policy adviser at the Institute for Chartered Accountants in England and Wales, said the new system, which comes into force in 2019, would amount to treating small businesses as a ‘cash cow’.

She said: “Not only are the record keeping obligations going to be much more onerous but making mistakes will become much more expensive. It is a draconian measure and you will end up with many more people being punished.”

LINK: Making Tax Digital