Government published two policy papers on its intended reform to sanctions for late submission and late payment following Budget 2021 (3 March 2021)
Late Payment
- The intended changes will initially apply to VAT and Income Tax Self-Assessment (ITSA)
- As part of the reform interest charges and repayment interest will be harmonised to bring VAT in line with other tax regimes
- HMRC will charge late payment interest on tax that is outstanding after the due date regardless of whether a penalty has been issued and it will be calculated as simple interest at a rate of 2.5% + the Bank of England base rate
- Changes to the regime will apply in respect of;
- VAT for accounting periods beginning on or after 1 April 2022 and
- ITSA individuals with business or property income over £10k per year and required to submit digital quarterly updates through Making Tax Digital for accounting periods beginning on or after 6 April 2023
- To all other ITSA taxpayers for accounting periods beginning on or after 6 April 2024
- There are two penalties which may apply under the new regime;
- First penalty
- no penalty will be incurred if the outstanding tax is paid within 15 days after the due date
- After 15 days, a penalty of 2% of the tax outstanding will be applied
- This increases to 4% of the tax outstanding if the tax remains outstanding thirty days after the tax was due to be paid
- First penalty
- Second penalty with annualised penalty rate
- If the tax remains outstanding thirty-one days after it became due the taxpayer will incur a further penalty on the tax that remains outstanding
- The second penalty will accrue on a daily basis at a rate of 4% per annum on the outstanding amount and will stop accruing when the tax due is paid
- HMRC will offer time to pay arrangements and if a time to pay arrangement is agreed with HMRC then the penalty will cease to accrue from the day the taxpayer approached HMRC to agree the time to pay arrangement. Late payment interest will continue to be charged on amounts outstanding after the due date even if a time to pay arrangement is in place
- HMRC will be operating a light touch approach to applying the first penalty of (2% after 15 days) allowing taxpayers thirty days to approach HMRC in the first year but the 4% penalty will be charged on any tax still outstanding after thirty days
- As with all penalty regimes, HMRC will have discretionary power to reduce or not to charge a penalty for late payment if it considers it appropriate to do so in the circumstances and the same principles of reasonable excuse will apply
- Any penalties raised will be appealable via the appeals and review process as normal
Penalties for late submission
- As above the reforms to penalties for late submission will initially apply to VAT and ITSA and will apply to the same categories of taxpayers from the same dates listed above
- The new points-based penalty regime will initially apply only to those taxpayers who have submission obligations for ITSA and VAT regularly (i.e., monthly, quarterly or annually)
- Taxpayers will no longer received automatic penalties for failing to meet submission obligations. Instead they will incur a certain number of points for missed obligations before financial penalties are levied
- Taxpayers will receive one point for every missed submission deadline and HMRC will notify the taxpayer of each point incurred. When a taxpayer reaches a certain threshold of points a financial penalty of £200 will be charged
- Once the points threshold is met and a penalty charged, a further penalty will be charged upon every late submission, but the points will not increase
- For annual submission obligations the threshold is 2 points
- For quarterly submissions (including Making Tax Digital for ITSA) the threshold will be 4 points
- For monthly submissions the threshold will be 5 points
- The points will be totalled separately for different submission obligations. For example, if a taxpayer has to submit an ITSA and VAT returns then the points will be accrued separately
- Generally, if a taxpayer makes two or more failures relating to the same submission obligation in the same month, they will only incur a single point for that month to prevent the taxpayer from reaching the threshold too quickly
- There are exceptions to this rule including the maximum of one point per month for two or more failures relating to the same submission obligation in the same month will not apply across different ITSA submission deadlines
- The points incurred by a business will have a lifetime of two years and the two year period will be calculated from the month after the month in which the failure occurred
- Points will not expire when the taxpayer has reached the threshold until the taxpayer has met the following conditions;
- A period of compliance – meeting all submission obligations on time for the period of compliance;
- For annual submissions, the period of compliance will be 24 months
- For quarterly submissions, the period of compliance will be 12 months
- For monthly submissions, the period of compliance will be 6 months
- Submitted all submissions which were due within the preceding 24 months
- A period of compliance – meeting all submission obligations on time for the period of compliance;
- HMRC will have time limits for levying a point against a taxpayer dependent on the frequency of the submission which has been failed;
- Points relating to a failure to submit an annual submission will be 48 weeks
- Points relating to a failure to submit a quarterly submission will be 11 weeks
- Points relating to a failure to submit a monthly submission will be 2 weeks
- HMRC will have two years to assess a financial penalty for failure to submit a return or other document on time
There will also be special adjustments made to the points threshold for taxpayers who alter their submission frequency.
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