The new penalty regime for the late payment of income tax and VAT is “overly complex” and needs to be simplified, according to the Tax Faculty’s response to the Finance Bill. It’s also recommending the deferral of changes to the construction industry scheme.
In a series of briefings submitted to MPs with suggested amendments to the Finance Bill, ICAEW’s Tax Faculty has urged the government to rethink its new late payment penalty regime, give the construction industry more time to adapt to changes implemented on 6 April 2021, and make clarifications to ensure that the legislation delivers tax policy intentions.
Late payment penalties for income tax and VAT
In ICAEW REP 39/21, the faculty outlines its concerns with proposals to change the penalty regime for taxpayers that have missed income tax and VAT payment deadlines.
Currently, taxpayers face a penalty of 5% of income tax owed if they haven’t paid 30 days after the due date and additional 5% penalties six months and twelve months from the due date. If a business makes a late payment of VAT this is considered to be a ‘default’ which may lead to a default surcharge.
The new regime replaces both these systems and would see a 2% penalty charge 15 days after the payment due date and a further 2% charge at 30 days. After 30 days a daily penalty is then charged until the tax is paid, this second penalty would be charged at an annual rate of 4%.
Late payment penalties are charged in addition to interest but will not be charged if the taxpayer has contacted HMRC to arrange time to pay and follows through on that arrangement.
The faculty argues: “The proposed rules are more complex than the current late payment penalty regime for income tax on which they are partially modelled, and that regime is itself not well understood by taxpayers.
“However good the communications, the proposed regime will not be well understood by taxpayers and will catch them unawares rather than acting as a deterrent.”
It also highlights that the approach may exacerbate taxpayer difficulties in contacting HMRC. “Even if more online contact options are made available by HMRC, these two trigger dates will only add to the pressures on HMRC helplines and taxpayers may find themselves unable to make contact, especially within the 15-day period,” it concludes.
The faculty urges the government to revert to its previous proposal to charge only the daily penalty, although it acknowledges that the rate at which this penalty is charged might need to change.
If the government remains committed to the first penalty, ICAEW recommends that the measure be simplified so that there is a single 30-day trigger point for the first penalty rather than two trigger points at 15 and 30 days.
Construction Industry Scheme
In ICAEW REP 38/21, the Tax Faculty has reiterated its concerns about recent changes to the Construction Industry Scheme (CIS), which are enacted in the Finance Bill and secondary legislation and urged the government to postpone commencement for 12 months.
The changes include amendments to deemed contractor rules to prevent a business deliberately avoiding operating CIS and changes to the cost of materials provisions to remove the ability for materials to be taken into account by more than one contractor.
“The changes came into effect on 6 April but the guidance that HMRC has published raises more questions than answers. It is now too late for businesses to plan and software developers to make necessary changes in advance of implementation date,” it says.
The faculty recommends deferring commencement until April 2022 to give businesses time to prepare, in a similar way to how the VAT reverse charge change was deferred for the construction industry.
The faculty highlights in particular the proposals for materials. “If implemented [the proposals] will not only reduce cash flow for contractors who do not hold gross payment status but also result in there being insufficient cash to pay sub-contractors amounts that they are owed.”
Further amendments to the Finance Bill on losses and termination payments
Three further representations from the Tax Faculty on the Finance Bill, highlight the crucial need for clarity in drafting legislation.
In ICAEW REP 36/21, the faculty warns that the attempt to ensure that UK furnished holiday letting (FHL) businesses can off-set trading losses from 2020/21 and 2021/22 over the previous three years, will not succeed without the suspension of s127(3A), Income Tax Act 2007. It outlines an additional sub-section to be included in the Bill that will ensure that FHL are able to take advantage of the temporary measure to support businesses with the impact of COVID-19.
The government has tabled a proposed amendment to clarify that as individuals are not normally entitled to claim sideways loss relief for losses of a UK FHL business, the extended loss carry back provisions will not apply to such losses.
Meanwhile, in ICAEW REP 37/21 the faculty focuses on the measures aimed at introducing an additional way to calculate post-employment notice pay. It argues that the wording of the legislation makes the new calculation compulsory which seems at odds with the policy intention that it should be an alternative option that employers can adopt if it benefits their employee, and outlines new wording to clarify.
ICAEW has also published further representations on the Finance Bill. ICAEW REP 35/21 on clause 9 on the super-deductions and other temporary first-year allowances.
Read the ICAEW Reps in full:
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