Reform of existing regime with a £200 points-based late submission penalty.

The reforms will come into effect as follows:

• VAT taxpayers for accounting periods beginning on or after 1 April 2022
• Income Tax Self Assessment (ITSA) Return for taxpayers with business or property income over £10,000 per year (who are required to submit digital quarterly updates through Making Tax Digital for ITSA) for accounting periods beginning on or after 6 April 2023, and to all other ITSA taxpayers for accounting periods beginning on or after 6 April 2024.

This measure introduces a new points-based penalty regime for regular tax return submission obligations, which replaces existing penalties for VAT and ITSA.

Legislation will be introduced in Finance Bill 2021 to create two new schedules.

The first schedule will provide for the new points-based late submission penalty regime for VAT and ITSA. This legislation will set the financial penalty at £200.

The second schedule will replace the deliberate withholding penalty for ITSA (currently set out in paragraphs 6(3)(a) and (4)(a) of Schedule 55 to Finance Act (FA) 2009) so it works effectively with the new points-based regime.

Late submission penalties

When a taxpayer misses a submission deadline they will incur a point. Points accrue separately for VAT and for ITSA.

A taxpayer becomes liable to a fixed financial penalty of £200 only after they have reached the points threshold.

The level of points threshold depends on the taxpayer’s submission frequency: Annually = 2 points / Quarterly = 4 points / Monthly = 5 points.

Individual penalty points accrued will automatically expire after 24 months provided the taxpayer remains below the points threshold. After the points threshold has been reached all points will expire after the taxpayer has met their return obligations for a set period of time based on their submission frequency: Annually = 24 months / Quarterly = 12 months / Monthly = 6 months.

If the taxpayer continues to miss submission deadlines after they have reached the points threshold and have been issued with a penalty, they will become liable for a further fixed rate penalty for each additional missed obligation. This is the case even if they have paid the fixed rate penalty.

In common with other tax penalties, a taxpayer will not be liable to a point or penalty if they had a reasonable excuse for not making the relevant submission on time and will have a right to appeal against both points and penalties.

Late payment
The new late payment penalty will consist of two separate charges. The first charge will become payable 30 days after the payment due date and will be based on a set percentage of the balance outstanding. The amount of that charge will depend on payments made or Time to Pay (TTP) arrangements that are agreed during those first 30 days.

There is no penalty at all if the taxpayer pays the tax late but within 15 days of the due date.

The first penalty is set at 2% of the outstanding amount if they pay between 16 and 30 days after the due date. It is set at 4% of the outstanding amount if there is tax left unpaid 30 days after the due date.

A second late payment penalty is charged at a rate of 4% per annum, calculated on a daily basis on the total unpaid tax incurred from day 31.

To avoid a penalty or penalties, the taxpayer will need to either pay or approach HMRC to agree a Time to Pay Arrangement, as shown in the table below.

First charge

Second charge

A second charge will also become payable from day 31 and will accrue on a daily basis, based on amounts outstanding. As with the first charge, the taxpayer can agree a TTP with HMRC.

The penalty will stop accruing from the date the TTP is agreed.

Notice of penalty

Both the first charge and second charge will be notified to the taxpayer and any amounts shown as payable on the notice will be required to be paid, or appealed, within 30 days of the date of that notice.

In common with other tax penalties, a taxpayer will not incur a late payment penalty if they had a reasonable excuse for not making the payment on time and will have a right to appeal against late payment penalties.

Interest

Legislation will align the interest rules for VAT to ensure they follow similar rules to those for ITSA. Provisions similar to the current FA 2009 s101, s102, Schedules 53 and 54 will be enacted to apply to VAT accounting periods starting after April 2022.

The measure will ensure that in VAT, where a payment is made after the due date, late payment interest will be payable from the date that payment became due until the date it is received by HMRC.

Late payment interest will also apply to VAT returns, VAT amendments and assessments and VAT payments on account.

Additionally, repayment interest will be payable in VAT either from the last day the payment was due to be received or the day it was received, whichever is later, until the date the repayment to the taxpayer is authorised or offset. Where a VAT repayment return has been received HMRC will not pay interest:

• for periods of reasonable enquiry where a full response has been received
• for periods where HMRC needs to correct errors or omissions in the return
• where security has been requested and not provided.