New HMRC Penalty System
HMRC is introducing a new points-based penalty system for late submissions, effective from April 2022 for VAT customers. For those submitting Income Tax Self Assessment (ITSA) and whose businesses and property income is over £10,000 per annum, the new system comes into effect from 6 April 2023. For all other ITSA submissions, the system will be effective from 6 April 2024.
The new system is intended to be fairer for those who occasionally miss deadlines, but cracks down on those who are consistently late with payments and submissions.
Currently, late submissions and payments of VAT returns results in an automatic fine, known as a single default surcharge, which is a certain percentage of the VAT due on the return. First defaults on business accounts are liable for a 2 per cent surcharge, followed by 5 per cent, 10 per cent and up to a maximum of 15 per cent.
Although the amount is fixed and does not increase over time, nor is interest accrued on late payments, the fines can nevertheless be substantial.
The new system, however, aims to bring VAT in line with existing penalty systems applied to direct tax returns.
Here’s how it will work:
There will be no penalty for late payments made within two weeks of the due date, but penalties will be applied in increasing amounts after this cut-off point.
- 2 per cent penalty of money owed if the late payment is made between 16 and 30 days after the due date.
- 4 per cent penalty of money owed if payment has not been made after 30 days.
- A second penalty of an additional 4 per cent per year, calculated on a daily basis of total money owing will be incurred from day 31.
Taxpayers should approach HMRC directly to agree on a Time to Pay Arrangement if they are struggling to pay their tax.
This is where the points system comes in.
- Each submission obligation has its own separate points threshold, depending on the frequency of tax returns, as follows:
- Annual submissions: two-point threshold
- Quarterly submissions: four-point threshold
- Monthly submissions: five-point threshold.
- One point is accrued following a late submission.
- Failure to meet one obligation but submitting on time for others will only accrue one point corresponding to the late or missed submission.
- Once the points threshold of a submission obligation has been reached, a capped fine of £200 will be payable.
- Further missed submission deadlines after a penalty fine has been issued will result in further penalties.
- Penalty points will expire after two years, providing the account remains under the point threshold and current submission deadlines have been met.
- If the points threshold has been reached, points will only be reset once all deadlines have been met for a particular time period:
- Two years for annual submissions
- 12 months for quarterly submissions
- Six months for monthly submissions.
- In addition, taxpayers will need to submit everything outstanding over the previous two years.
The new system will make things fairer because where you make two late monthly submissions, you’ll only accrue one point; the idea being to provide taxpayers with a chance to improve and not suffer too many penalty points and hence financial consequences.
However, it will be tricky to explain the taxpayer’s penalty points position at any given time, and for those registered on numerous schemes, it might be difficult to keep up to date. An unforeseen event could trigger missing multiple returns/payments and hence points could rack up quickly and penalties payable could escalate.
Next steps: This is a progressive scheme encouraging clients to meet their deadlines and allowing the occasional delays that taxpayers may encounter. The message is still that clients should do their best to meet every deadline, as it is good practice and avoids uncertainty and unnecessary costs escalating.
Verdict: A progressive scheme, which will make things fairer overall.
You can find out more about the new scheme and how it may effect you here.
If you have any questions related to the topics within this article, please don’t hesitate to contact us.