Spring Budget 2021: Tax compliance

Investment in HMRC

The government is to invest a further £180m in HMRC in 2021/22, providing funding for additional compliance activity, the initial stages of developing a digital system for business rates and investment in IT systems to improve taxpayer access to online services. ICAEW will be working with HMRC to understand exactly where this investment will be made.

Interest and penalties

Although not mentioned in the Budget speech, the government is proceeding with introducing a new penalty regime for late submission of tax returns and late payment of tax, as well as harmonising interest rules across different taxes. These changes follow consultation in 2016 to 2018; the changes are significant, and the Tax Faculty will cover them in more detail in future communications and webinars. The Tax Faculty has considerable concerns about the proposed late payment penalty regime and will be making further representations. 

Late submission penalties

FB 2021 will include provisions introducing new penalties for late submission of tax returns.

The start dates for the new penalty regime are as follows:

• VAT – periods starting on or after 1 April 2022.
• MTD for income tax self assessment (MTD for ITSA) – accounting periods beginning on or after 6 April 2023 for taxpayers with business or property income over £10,000 per year (ie, taxpayers who are required to submit digital quarterly updates through MTD for ITSA).
• Other ITSA taxpayers – accounting periods beginning on or after 6 April 2024.

Taxpayers will no longer receive an automatic late filing penalty if they fail to meet a submission obligation. Instead, they will incur a certain number of points for missed obligations before a financial penalty is levied. The penalty has been set at £200.

Late payment penalties and interest harmonisation

FB 2021 will include provisions introducing new penalties for late payment of tax and harmonising interest rules across different taxes.

The reforms come into effect:

• VAT – periods starting on or after 1 April 2022.
• MTD for income tax self assessment (ITSA) – accounting periods beginning on or after 6 April 2023 for taxpayers with business or property income over £10,000 per year (ie, taxpayers who are required to submit digital quarterly updates through MTD for ITSA).
• Other ITSA taxpayers – accounting periods beginning on or after 6 April 2024.

Two late payment penalties may apply. A first penalty of 2% of the unpaid tax is charged on tax unpaid 15 days after the due date, increasing to 4% if the tax remains unpaid 30 days from the due date. An additional penalty at an annualised penalty rate of 4% will accrue on a daily basis on tax remaining unpaid after 30 days. The penalties will not be levied if the taxpayer has contacted HMRC to arrange time to pay by the trigger date for the penalty, so long as the taxpayer ultimately agrees the time to pay arrangement.

The interest harmonisation rules broadly bring the VAT rules into line with the current rules for income tax.

Tax administration strategy

The consultations published on 23 March included those supporting the government’s 10-year tax administration strategy. This included a call for evidence on what is to be known as "TAFR" – Tax Administration Framework Review.

It was announced at Budget 2021 that this review will also consider large businesses’ experiences of UK tax administration, recognising their role in supporting UK competitiveness and promoting investment.

Find out more

• Tax Administration Framework Review is ‘mammoth’ undertaking by HMRC 

Electronic sales suppression

Electronic sales suppression (ESS) is where businesses or individuals use technology to artificially reduce their reported sales and corresponding tax liabilities. New electronic sales suppression-specific powers will make offences of the possession, manufacture, distribution and promotion of electronic sales suppression software and hardware. HMRC will also be granted specific information powers allowing its investigators to identify developers and suppliers in the electronic sales suppression supply chain and to access software developers’ source code and the locations of code and data.

The government held a call for evidence on ESS and published its response in June 2020.

The measure will take effect from Royal Assent of FB 2021.

Seize in situ

A civil penalty will be introduced for the unauthorised removal of goods that have been seized ‘in situ’ (those kept on the trader’s premises). A penalty would apply to traders removing seized goods without prior authorisation from HMRC and will apply from Royal Assent of FB 2021.

Amendment to Customs and Excise review and appeals legislation

HMRC is to be given the power to temporarily approve businesses that appeal a decision to revoke their approval to operate within certain due diligence schemes, designed to protect the payment of duties on goods.

The schemes are:

• Alcohol wholesaler registration scheme
• Warehousekeepers and owners of warehoused goods
• Registered dealers in controlled oil
• Tobacco products machinery licensing
• Raw tobacco approval scheme
• Fulfilment houses

This will preserve the businesses’ right of appeal, by ensuring that those that entirely depend on such approval to legally trade have the opportunity to remain financially viable, while their appeal is being heard. Temporary approval will only be allowed in certain circumstances and will last only while the business pursues its appeal. Legislation will take effect following Royal Assent of FB 2021.

HMRC civil information powers: a new financial institution notice

A new financial institution notice will be introduced which can be used under certain circumstances to require financial institutions to provide information to HMRC for the purposes of checking the tax position of a specific taxpayer, including on behalf of overseas tax authorities, without the need for approval from the independent tax tribunal.

• Read Amending HMRC’s Civil Information Powers for more information including taxpayer safeguards.

New reporting rules for digital platforms facilitating the supply of services

New reporting rules are being proposed which will affect digital platforms in the UK that facilitate the provision of services by UK and/or other taxpayers. They would affect individuals and companies supplying services, but would not currently apply to the sale of goods. These groups may be affected at a later stage, subject to consultation.

Examples of services affected include taxi and private hire services, food delivery services, freelance work and letting short-term accommodation.

For more on this framework, see Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy, approved by the OECD/G20 Inclusive Framework on BEPS on 29 June 2020.

The rules will require digital platforms to send information about the income of their sellers to HMRC as well as to the seller themselves and is intended to help taxpayers in the sharing and gig economy get their tax right and help HMRC detect and tackle non-compliance.

The regulations, which will be subject to consultation before they take effect, are not expected to come into force before 1 January 2023, with reporting not due until January 2024.

Find out more:

• Reporting rules for digital platforms

Tackling tax avoidance

No Budget would be complete without including measures to tackle tax avoidance. However, the announcements that were made did not propose new measures. They have been announced previously and have been subject to consultation.

Tackling promoters of tax avoidance

Legislation will be included in FB 2021 which will allow HMRC to take earlier and more decisive action against promoters of tax avoidance schemes. These measures were first published for consultation in July 2020 to which the Tax Faculty responded as Representation 69/20. The following amendments will be made to strengthen the existing anti avoidance rules, as follows:

• Strengthen HMRC’s information powers in the enablers of tax avoidance schemes rules to allow enabler penalties are issued earlier.
• Enable HMRC to act promptly where promoters fail to disclose their avoidance schemes under the disclosure of tax avoidance scheme and disclosure of VAT and other indirect taxes regimes.
• Allow HMRC to stop promoters from marketing and selling avoidance schemes earlier and ensure promoters fulfil their obligations under the promoters of tax avoidance schemes (POTAS) regime.
• Make further technical amendments to the POTAS regime, so the regime can continue to operate effectively.
• Make additional changes to the general anti-abuse rule (GAAR) so it can be used as intended to tackle avoidance using partnerships.

The above amendments will take effect from Royal Assent, which is expected in mid-July 2021.

Follower notices and penalties

Legislation will be included in FB 2021 to change the penalties that may be charged to people receiving follower notices as a result of using avoidance schemes. This follows a consultation late in 2020 following concern that the existing penalty rates were too high and discouraged taxpayers from coming forward to settle. The Tax Faculty responded as Representation 10/21 and was broadly supportive of the proposed changes.

Under the changes, the normal rate of penalty under the follower notice provisions for failure to amend a return will be reduced from the current 50% to 30% of the tax in dispute. A further penalty of 20% will only be charged if a Tribunal decides that the taxpayer’s continued decision to try and litigate the position was unreasonable.

The above amendments will take effect from Royal Assent, which is expected in mid-July 2021.

Tax conditionality: new tax clearance requirement when applying for certain licences

In what will be a new development for the UK but which is modelled on a similar but more comprehensive measure in Ireland, the ability to obtain certain licences (taxi drivers, private hire and scrap metal dealers) will depend upon whether the licence applicant has first obtained a tax clearance from HMRC that their tax affairs are in order.

The purpose of the measure is to make it harder for non-compliant traders to operate in the hidden economy and follows a consultation originally published back in 2016. The latest proposals in evidence to the House of Lords Finance Bill sub-committee, published as Representation 88/20.

Licensing bodies will have to obtain confirmation that an applicant has completed the check before making a decision on their renewal application.

Legislation will be included in FB 2021 and will take effect in England and Wales from 4 April 2022. Similar measures will take effect in Scotland and Northern Ireland from April 2023 following a consultation published on 23 March 2021.

CGT gift hold-over relief for non-residents

The Budget announcements included a new measure to clarify an existing CGT anti-avoidance rule which denies the availability to claim gift hold-over relief for transfers of business assets where it is made by non-residents. An anti-avoidance rule in s167(2), Taxation of Chargeable Gains Act 1992 disapplies the entitlement to relief where a transferee company is controlled by a person who is not resident in the UK and is connected with the person making the disposal. The new measure will clarify that the rule applies when the non-UK resident person gifting the asset also controls the recipient company. The legislation to implement this change will be included in FB 2021.