HMRC to Gain New Powers as ISA Providers Face Tougher Penalties Under Compliance Overhaul

ISA providers will be subjected to stricter HMRC oversight and tougher financial penalties as proposed reforms strengthen compliance HMRC’s proposed reforms.

The draft measures seek to modernise ISA provider reporting while strengthening the tax authorities’ ability to address continued violations of ISA rules. It is anticipated that the first set of reforms will be in place by April 2027, and the full compliance framework will go live by April 2028.

Proposed reforms will require ISA managers to provide monthly and annual returns electronically and will reduce some of the existing reporting processes. Those returns will also be subject to a points-based penalty and governance framework similar to the rest of tax reporting and compliance.

The most notable of these reforms is the new ability for HMRC to suspend an ISA provider’s approval as opposed to an immediate withdrawal of their authorisation. It is believed this will provide a better balance of enforcement for firms that repeatedly breach the regulations and will also enable a corrective approach without the complete market removal of the providers.

The compliance framework provides for additional financial penalties where ISA rules are breached, and in more severe breaches, compliance failure-related financial charges may be brought against the providers. Additionally, HMRC would be empowered to pursue the loss of tax amounts that should have been paid from breaches of ISA rules.

The reforms coincide with the Government’s processes to evaluate and update the broader ISA systems and provide improvements to the system focused on increasing the levels of investment while balancing the tax incentives for savings.

Although industry groups have welcomed the development of new reporting standards, they have concerns about how the development of standards, particularly the complexity of standards and increased levels of enforcement, relates to the costs of compliance, and may lead to decreased levels of participation in the Investment Savings Accounts (ISAs).

From the perspective of HMRC, in developing new reporting standards, an aim is to increase fairness and the transparency of the system. It is acknowledged that existing reporting systems, particularly digital reporting, are used to exploit tax benefits for ISA holders, and this practice is to be curtailed. HMRC feels the new reporting standards will be more supportive of compliance, and will not overly constrain firms who make honest mistakes. New reporting standards will provide more mechanisms for HMRC to address more significant and/or repeated failures of compliance.