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.
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.