Businesses now only have a couple of years left to prepare themselves for the introduction of quarterly online tax reporting, under the Government’s Making Tax Digital plans.

While this may seem like a distant way off, in reality businesses will have to completely adapt their practices and procedures for recording financial information and incorporate suitable online accountancy software into their operations.

The Government believes that the initial cost of implementing this into British businesses will be around £1 billion, but the Institute for Chartered Accountants in England and Wales has suggested the figure could be nearer to £3 billion and could rise again to £7 billion, depending on what is required further down the line.

The changes will also create a significant administrative burden for businesses and will create additional compliance requirements.

But what happens if a business fails to submit their quarterly report on time?

The Government has said that businesses will have 12 months after their quarterly reporting requirements begin to get their affairs in order and ensure the necessary procedures and software are in place.

The Government is currently consulting on three possible options when it comes to penalising businesses that fail to comply after this date.

Points-based system

Under this proposal a business would receive a point each time they failed to provide a submission on time.

Once they reach a certain number of points the business would receive a penalty. According to the consultation businesses are likely to be allowed three non-compliance incidents before a penalty is applied.

Once a penalty is issued the business must meet future reporting deadlines over a ‘sustained period’ before their slate is cleared and they can start anew without accumulative penalties.

HM Revenue & Customs (HMRC) proposes that the period of good compliance required to reset the points total to zero would vary.

In its consultation guidance the Revenue states: “If we reduced the requirement for customers with annual obligations too they would only need to provide one submission on time.

“One submission received on time does not amount to the development of a good habit. Accordingly, we consider it appropriate to retain the requirement of 24 months of sustained good compliance (now expressed as two submissions) for customers making one submission a year.”

It adds: “Points are designed to ensure that isolated failures do not attract a penalty. But where the desired improvement in filing takes place, resetting points to zero rewards that improvement and encourages the establishment of a firm habit of providing submissions on time.”

Annual HMRC review of compliance

This option would see HMRC carry out an automated review of the business’ compliance with submission obligations once a year on a ‘tax-by-tax’ basis.

During this set period there would be no initial penalty for the first failure, however additional defaults would see a penalty charged at the time of the annual review, which would be based upon the level of a business’ non-compliance.

Penalties would therefore be based on the customer’s history of compliance with their submission obligations, allowing multiple failures to be incorporated into a single penalty. This could mean that the penalty might be charged much later, some time after an individual’s failure.

Under this system, businesses would be notified of their failure to comply once it is identified by HMRC and given time to fix it before a penalty is issued.

The penalty would only apply for failure to report quarterly, and not for the annual return which will be treated differently.

Suspended penalties

The third option would see a suspended penalty whereby HMRC would not charge a penalty immediately on the first failure; instead it would be temporarily delayed on condition that the business provides the outstanding submission within a specified time following a notification.

The consultation hints that taxpayers would have two late submissions before a fine kicks in. It also suggests that the suspension could be applied on more than one occasion but “it is not the Government’s intention to encourage taxpayers to establish a pattern of repeatedly providing submissions late, so the number of occasions on which a penalty would be suspended would need to be limited.”

Each of these penalty options will be applied where a taxpayer has failed to meet their reporting obligations and does not have a reasonable excuse for doing so. Taxpayers will still have the right of appeal against all penalties and the recording of failures that do not, immediately, give rise to a penalty.

There are currently no indications of the size of the penalties likely to be applied within the consultation document, but under certain options, it may be that they are applied more frequently.

The 24-page consultation, Making Tax Digital: sanctions for late submission and late payment will remain open for comments until 11 June.

Milsted Langdon’s specialists can assess the most appropriate way for you to implement MTD in line with HMRC guidance, as well as offering a full range of business tax planning and administration services.

We can assist with a wide range of online accountancy software packages and provide access through our Portal.

The Portal allows businesses easy access to their online accounts anywhere in the world, regardless of the accounting software that they use.

For more information, please contact us or visit our Making Tax Digital page for more details and regular updates on the Making Tax Digital initiative.