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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.
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:
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 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:
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.
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:
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.
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:
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.
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:
Late payment penalties are calculated as below:
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 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:
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.
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.
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.
Paul Masson
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