HMRC’s new penalty regime for the late submission of tax returns and late payment of tax

HMRC is changing its penalty regime for the late submission and payment of certain types of tax return.

The changes will come into effect for VAT registered businesses for VAT return periods beginning on or after 1 April 2022, for income tax self-assessment (“ITSA”) taxpayers with business or property income over £10,000 per year (who are mandated for Making tax Digital (“MTD”) for ITSA) from 6 April 2024, and for all other ITSA taxpayers from 6 April 2025.

The new penalty regime is aimed to be fairer and more consistent across the taxes than the current regimes, which penalise the same behaviour in different ways, as highlighted below.

Outgoing VAT regime

There is currently no standalone late payment penalty for VAT. Instead, late submission of a VAT return and/or late payment of a VAT liability currently falls under the same default surcharge regime, with a surcharge arising where:

  • A taxpayer has defaulted in a VAT period;
  • HMRC serves either:
    • a surcharge liability notice specifying a surcharge period from the date of the notice to the first anniversary of the last day of the VAT period for which the default arose; or
    • where the last day occurs during an existing surcharge period, a surcharge liability notice extension extending the existing surcharge period to first anniversary of the last day of the VAT period for which the default arose;
  • It is in default in respect of another VAT period which ends within the surcharge period specified in, or extended by, that notice; and
  • It has an amount of “outstanding VAT” in the period of default.

No liability to a surcharge arises where a nil or repayment VAT return is submitted late, or the payment due is made on time but the VAT return is submitted late. HMRC will, however, record the default and issue a surcharge liability extension notice.

The rate of surcharge applicable is the greater of £30 and “the specified percentage” of any outstanding VAT for the period in default:

Specified percentage
In relation to the first such period2%
In relation to the second such period 5%
In relation to the third such period 10%
In relation to each such period after the third15%

The new regime introduces separate penalties for late submission and late payment of liabilities arising. This should be considered a fairer approach to penalties as they will be determined by how late the submission and/or payments are.

Outgoing ITSA regime

Unlike the VAT default surcharge regime, separate late filing and late payment penalties currently apply to ITSA taxpayers.

Late filing penalties

HMRC currently impose the following late filing penalties on ITSA taxpayers:

Period submission of return delayed by:Penalty
1 day£100
3 monthsTaxpayers may have to pay £10/day for a maximum of 90 days
6 monthsA further penalty of 5% of the tax owed or £300, whichever is greater
12 monthsA further penalty of 5% of the tax owed or £300, whichever is greater. In some cases, taxpayers may have to pay up to 100% of the tax owed.

Late payment penalties

Three separate late payment penalties can currently apply to ITSA taxpayers. These are calculated as 5% of the outstanding tax due for the year at:

  • 30 days following the 31 January filing deadline;
  • 6 months following the 31 January filing deadline; and
  • 12 months following the 31 January filing deadline.

The new penalty regime

Under the new penalty regime, the late filing and late payment penalties for VAT and ITSA will be harmonised. This should make the importance of taxpayers complying with their submission and payment obligations clearer and make late payment penalties more proportionate to the lateness of payment.

The new late filing penalty

Late filing of updates, VAT returns and self-assessment tax returns will be subject to the new penalty.
The new penalty regime introduces a points-based system whereby taxpayers will be given a point each time they miss a submission deadline. Each point will be notified by HMRC. Once a taxpayer’s points reach the relevant penalty threshold (determined by how regularly the taxpayer is required to file returns – please refer to the table below) HMRC will issue a penalty of £200. The points totals are separate for each type of return submitted. For example, points issued for the late submission of a VAT return will not count towards future ITSA submissions.

The penalty thresholds are:

VAT return frequencyPenalty threashold
Annual2 points
Quarterly4 points
Monthly5 points

If a taxpayer accrues points but does not reach the penalty threshold, those points will expire after two years from the month after the month in which the failure occurred.

After a taxpayer has reached the penalty threshold, all the points accrued within that points total will be reset to zero when both of the following conditions are met:

  1. Met all submission obligations on time for a period of compliance:
    • Annual submissions: 24 months
    • Quarterly updates and submissions: 12 months
    • Monthly submissions: 6 months; and
  2. Filed all the submissions which were due within the preceding 24 months. It does not matter whether these submissions were initially late.

Where a taxpayer is at the penalty threshold and has met the above compliance requirements but has not submitted any outstanding submissions, the points will not expire. The taxpayer will remain at the penalty threshold and will be charged penalties for any further late submissions of returns.

Additional points to note:

Time limits for levying a point will depend on a taxpayer’s submission frequency and start from the day on which the failure occurred, as follows:

Submission frequencyTime limit for levying a point
Annual48 weeks
Quarterly11 weeks
Monthly2 weeks

HMRC will have two years after the failure which gave rise to the penalty to assess a financial penalty. Additional time limits apply in cases where a Tribunal decision results in the cancellation of a point or a financial penalty, and in cases where HMRC discovers that a taxpayer had previous submission obligations which HMRC were unaware of at the time.

Changes in reporting frequency of return filings will result in an adjustment to the taxpayer’s points total according to the change they are making as follows:

Submission frequencyAdjustment to points total
Annual to quarterly+2 points
Annual to monthly+3 points
Quarterly to annual-2 points
Quarterly to monthly+1 point
Monthly to annual-3 points
Monthly to quarterly-1 point

A taxpayer cannot have a negative number of points so if the adjustment would lead to a negative number, the taxpayer will be treated as having zero points. Different time limits will apply depending on whether additional points are added or deducted.

VAT groups have additional considerations to bear in mind in cases where: the representative member of the group is changed; a new group member joins; a group member leaves a VAT group; or indeed where a new VAT group is formed.

Non-standard accounting periods will generally be excluded from the new penalty regime where such periods are transitional (i.e. at the beginning or end of a period of VAT liability or where there has been a change in return frequency). This exception will not apply to any deliberate failures to submit.

Additional information in respect of the new late filing penalty can be found in HMRC’s policy paper.

The new late payment penalty

HMRC are aligning the penalty regime in respect of the late payment of any tax due on VAT returns and ITSA returns. The new penalty will vary depending on what the taxpayer pays and when:

Days past due datePenalty due
0-15No penalty due
16-29A first penalty of 2% of any unpaid tax due at day 15
30A further 2% of any unpaid tax due at day 30
31A second penalty of 4% per annum of any unpaid tax due at day 31 (calculated on a daily basis)

Taxpayers who have not paid their tax by the payment deadline are therefore encouraged to make their payment as close to the payment deadline as possible to stop late payment penalties from accumulating daily.

Taxpayers who are unable to pay their tax in full by the payment due date should contact HMRC to set up a time to pay arrangement to avoid penalties.

Where late payment penalties are due, these will be notified by HMRC and be payable within 30 days of the date of that notice.

Interest harmonisation

In addition to a late payment penalty, HMRC will charge interest on any payment received late.
The current VAT interest rules will change to be consistent with the current ITSA interest rules:

  • Late payment interest will be charged to a taxpayer when an amount due remains unpaid at the due date, from that due date until the payment is received by HMRC.
  • HMRC will pay repayment interest on either overpaid tax or tax refunds (or both) due to be repaid.

Additional information in respect of interest harmonisation and penalties for late payment and late filing can be found in HMRC’s policy paper.

Reviews and appeals

A taxpayer will be able to challenge a point or penalty through both an internal HMRC review process and an appeal to the First Tier Tax Tribunal. Penalties will not be incurred in circumstances where a taxpayer had a reasonable excuse for not making the submission and/or payment by the required due date.

Conclusion

The new penalty regime is designed so that it can be applied to other taxes with regular payment and submission obligations, to provide a clear and consistent approach to the tax system. It provides assurance, to those generally compliant taxpayers, that an occasional failure to meet submission or payment deadlines, will not be treated in the same way as those taxpayers who persistently have poor tax compliance.

Contact us

If you require assistance with your VAT or ITSA filing obligations, or would like more information on the new penalty regime please contact Alastair Wilson, Chris Hodgson or Hydeam Sulton.