United Kingdom: HMRC Penalty Reforms for Late Income Tax Self-Assessment and VAT Submissions

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published on 22 september 2022 | reading time approx. 5 minutes

 

Taxpayers have always been obliged to submit returns and remittances by a pre-set deadline, but HMRC is changing how it penalises late submissions and payments.

 

 

Reforms of the penalty structure apply initially to Income Tax Self-Assessment (ITSA) and VAT taxpayers, although they may be rolled out across other categories in the future.

 

The aim is to introduce greater consistency between taxes and ensure the penalties or fines associated with late submissions are fair.
 

Changes to Automatic Fines for Late VAT and ITSA Returns

One of the biggest variances from the current system is that HMRC will scrap automatic financial penalties for late returns.

 

Rather than being fined immediately for failing to submit a return or providing any other information HMRC has requested, taxpayers will incur a set of penalty points depending on the time lapsed.

 

The points-based system means that, provided a taxpayer brings their affairs back into good standing and maintains on-time submissions in the future; they will not pay an additional charge.

 

ITSA or VAT taxpayers who are consistently late will accumulate further penalty points, giving rise to a financial penalty.

 

This new penalty point scheme will apply from: 

  • 1st January 2023 onward for VAT customers.
  • 6th April 2024 for ITSA taxpayers included in the mandatory Making Tax Digital for ITSA roll-out, provided they have an income of £10,000 a year or more.
  • 6th April 2025 for all other ITSA taxpayers.

 

The changes will impact only taxpayers with regular, ongoing submission obligations, although this will apply regardless of whether returns are filed monthly, quarterly or annually.
 

Late ITSA and VAT Return Penalty Points

Late submission penalty points are assigned whenever a taxpayer misses a deadline.

 

After the points reach a threshold (where subsequent returns are also late), HMRC will charge a £200 financial penalty.

 

Thresholds vary depending on the regulatory of VAT or ITSA returns:

 

VAT or ITSA Return FrequencyPenalty Point Threshold
Annual returnsTwo points
Quarterly returnsFour points
Monthly returnsFive points

 

If a taxpayer hits the threshold, they will be fined for that instance, and again every time they fail to submit a return on time - but their points will not increase further.
 

Penalty Points for Multiple Tax Submission Obligations

Where taxpayers must submit both ITSA and VAT returns, their points totals will be accumulated and tracked separately.

 

HMRC will apply penalty points only to the return in question, so if both are required, one point may be assigned for a late ITSA submission and one for a late VAT return.

 

Likewise, if the same taxpayer has two or more late filings in the same month, but both relate to the same tax category, they will only incur one penalty point.

 

Exceptions apply as follows: 

  • If the taxpayer has several MTD for ITSA obligations, the maximum of one monthly penalty point does not apply. They could incur multiple points if they miss several submission deadlines in the same month (e.g. End of Period Statement, quarterly return and final declaration due dates).
  • Taxpayers required to submit MTD for ITSA information for two or more organisations will attract one penalty point for all late submissions within the same month.

 

The focus is on deterring late submissions rather than reaching the penalty threshold too quickly.

 

Taxpayers will be able to demonstrate compliance going forward to avoid paying a fine.
 

HMRC Penalty Point Expiry Periods

Penalty points will not remain static ad infinitum - they will expire over time to avoid past late submissions prompting continual financial penalties.

 

Points will expire two years after the month following the late submission period.

 

As previously mentioned, points do not expire when the taxpayer reaches the penalty threshold, which means they need to maintain on-time compliance to reset their penalty points balance.

 

When the threshold is reached, penalty points will only expire before two years when the taxpayer: 

  • Meets all submission obligations, on time, for a minimum period.
  • Files all late submissions due within the previous 24 months.

 

Compliance periods vary according to the taxpayer's submission frequency and last from six months (for taxpayers who file returns monthly) to two years for those who submit annual returns.

 

Taxpayers must meet both of the above requirements to reset the penalty points to zero; if one action is not completed, the taxpayer stays at the penalty threshold and will attract a fine for all future late submissions.
 

VAT & ITSA Late Payment Penalties

Penalty points apply to late submissions, and a separate charge will be levied if a taxpayer submits a return on time but fails to remit the amount owing.

 

For VAT taxpayers, the existing default surcharges will be replaced with a new harmonised penalty system, which applies to VAT and ITSA.

 

The new late payment charge will have two elements: 

  • Penalty one is payable 30 days after the missed due date, calculated as a percentage of the balance outstanding.
  • Penalty two will become payable from the 31st day after the deadline and accrue daily until the amount owing is paid or the taxpayer sets up a Time to Pay agreement.

 

Late payment penalties are calculated as below:

 

Number of Days LatePenalty
0 - 15Zero
16 - 302%
31 onwards2% of the day 15 balance, plus 2% of the day 30 balance

 

HMRC will issue penalty notices for both sets of late payment charges, and the taxpayer will be given 30 days to pay the amount owing or lodge an appeal.

 

In some scenarios, HMRC may waive the penalty if there is a 'reasonable excuse' for the late payment.
 

Interest Charges on Late VAT or ITSA Remittances

Interest charged on late VAT account balances will follow the ITSA rules, applicable to all VAT accounting periods from 1st January 2023 onward.

 

Any late VAT payment will be exposed to interest from the payment due date until HMRC receives the remittance.

 

Late payment interest will apply to: 

  • VAT returns
  • VAT amendments
  • VAT assessments
  • VAT payments on account

 

HMRC will also pay repayment interest on VAT refunds owing to taxpayers, calculated from the latter of the day the payment was due or the day it was received.

 

However, taxpayers with outstanding returns for other accounting periods or who fail to provide security information will not receive repayment interest.
 

Time Limits on HMRC Penalty Points and Fines

HMRC will need to levy penalty points within a maximum period, which again varies according to the frequency of VAT or ITSA returns.

 

Taxpayers with annual returns cannot be issued with a penalty point after 48 weeks, reducing to 11 weeks for quarterly return obligations and two weeks for monthly tax filings.

 

There is also a two-year time limit within which HMRC may assess a financial penalty from the date of the transgression.

 

However, if HMRC uncovers a previous late submission that it was not previously aware of, it can levy penalty points or fines within one year of the discovery.

 

If a Tribunal decides that points or fines have been assigned incorrectly, HMRC will have one year to adjust penalty points or raise new financial penalties for other late submissions or payments affected by the decision.
  

How Changes to VAT and ITSA Penalty Systems Will Affect Taxpayers

Although the mixture of penalty points, financial penalties and interest charges seems more complex than the current HMRC regime, it brings VAT compliance management into line with other tax categories.

 

VAT surcharges have long been criticised as disproportionate, with a fixed VAT surcharge of 2% to 15% regardless of the period elapsed since the due date.

 

HMRC's new penalty scheme may require some adjustment.

 

Still, long term, it should encourage more VAT and ITSA taxpayers to comply with submission and payment deadlines to avoid incurring points that could result in greater future fines.

 

The Policy Paper is available online should you require further detail.

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