Financial Matters

With David Frederick FCCA | Marcus Bishop Associates | marcus-bishop.com

Budget 2021 – HMRC New Direction of Travel

The recent Budget delivered by the Chancellor delivered a mixture of measures as part of the roadmap to resurrect the economy following the year long series of Covid-19 emergency support measures. Several notable budget talking points engaged commentators. Firstly, the increase in the personal allowance and higher rate threshold to £12,570 and £50,270, respectively in April 2021. These thresholds will remain frozen until April 2026, thus many taxpayers will walk into the higher income tax band. Secondly, limited companies corporation tax will increase to 25% from 1st April 2023, a small profits rate of 19% was introduced for all companies with profits under £50,000. Thirdly, the “stealth tax raids” in the form of the freeze on lifetime allowance for pension contributions. The consequence of which results in more people at risk of 25% levy on extra income from their pension fund, rising to 55% if they drawdown a lump sum. Despite these headline grabbers, deep within the Budget was the gentle announcement of HMRC introducing a new penalty based regime for regular tax return submission obligations. In short HMRC will replace the current fixed penalty regimes for income tax self-assessment and VAT. The new regime will mark the end of taxpayers receiving automatic financial penalties if they fail to meet a submission obligation. Taxpayers will now incur a number of points for missed obligations before a financial penalty is levied. According to HMRC, “This new points-based regime is designed to be proportionate, penalising only the small minority who persistently miss their submission obligations rather than those who make occasional mistakes.” The changes will take place over three stages to specific taxpayers: 1) 1st April 2022 - VAT registered businesses; 2) 6th April 2023 - Self-assessment tax payers with business or property income over £10,000; and 3) 6th April 2024 - All other self-assessment taxpayers. The timetable for the new penalty regime is reflective of the long term time planning timetable theme throughout the budget. Furthermore, this new regime is indicative of HMRC tax penalties in the future as HMRC states, “the new pointsbased system will initially apply only to those 3 taxpayers who have submission obligations for VAT and income tax self-assessment with a regular frequency. Under the new penalties regime, taxpayers will be awarded one point each time they miss a submission deadline. Once the taxpayer attains a certain threshold of points, a financial penalty of £200 will be levied and the taxpayer notified. Moreover, a penalty will be charged for every subsequent failure to submit tax obligations on time but the taxpayer will not experience any additional points. The point’s threshold is based upon the submission frequency of tax obligations as follows: • annual submission frequency - two points • quarterly submission frequency - four points & • monthly submission frequency - five points Penalty points will expire after two years unless the taxpayer is at their points’ threshold. If taxpayers are at their point’s threshold, they must satisfy two conditions before their points are reset to zero. The period of compliance is determined by the tax submission obligations as follows: • annual submission frequency - 24 months • quarterly submission frequency - 12 months & • monthly submission frequency - six months During the compliance period all tax submission obligations must be on time. The second condition to be satisfied by the taxpayer is their tax submissions must be complete. Both conditions must be met before the taxpayer’s points can be reset. HMRC will have discretionary power to levy a point or charge a penalty to a taxpayer. Similarly, a taxpayer will be able to challenge a point or penalty levied by HMRC. The only joy associated with the new penalties regime is it allows taxpayers sufficient time to practise timely submission of their tax submissions.