New penalty and interest regimes for VAT and income tax self-assessment
As announced in the Spring Budget 2021, a new penalty regime for the late submission of tax returns and late payment of tax is to be introduced for VAT and income tax self-assessment (ITSA). As part of these reforms, VAT interest charges and repayment interest will be changed to broadly bring them in line with those already in place for ITSA.
The new penalty regimes will come into effect as follows:
- For VAT accounting periods beginning on or after 1 April 2022.
- For ITSA 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.
- For all other ITSA taxpayers, for accounting periods beginning on or after 6 April 2024.
Late submission penalties
The existing penalties for VAT and ITSA will be replaced with a new points-based system and, when a taxpayer misses a submission deadline, they will incur a penalty point and will only be liable to a fixed financial penalty of £200 once the points threshold for that submission obligation has been reached.
Once the threshold has been reached, a penalty will be charged for that failure and each subsequent failure although the penalty points will not increase.
The points threshold will depend on the frequency of the taxpayer’s submissions: annually = 2 points, quarterly = 4 points, and monthly = 5 points. If the taxpayer stays below the relevant threshold, individual penalty points will automatically expire after 24 months. If a taxpayer is able to change their filing frequency, adjustments to their penalty points can be made.
The penalty point system will not apply where the taxpayer only has to make an occasional submission. This will continue to be covered by the current penalty regime in place for that submission.
There are time limits after which a penalty point cannot be charged and will depend on the frequency of submission and start from the day the failure occurred: annually = 48 weeks, quarterly (including MTD) = 11 weeks, and monthly = 2 weeks.
Where the points threshold has been reached, all points will expire once the taxpayer has met their tax return obligations for a certain time based on their submission frequency: annually = 24 months, quarterly = 12 months, and monthly = 6 months.
It will be possible to appeal against both the penalty point and fixed penalty. HMRC has discretionary power not to levy a penalty point or charge a penalty if they consider it is appropriate in the particular circumstances not to.
Late payment penalties
The new late payment penalty will consist of two separate charges and will depend on the payment date, the amount outstanding and any Time to Pay (TTP) arrangements which have been agreed.
The first charge becomes payable 30 days after the payment due date. Under these provisions, no penalty is due where payment is made within 15 days of the due date. If any tax remains outstanding 15 days after the due date, a 2% penalty of the unpaid tax is charged, which increases to 4% if the tax remains unpaid 30 days after the due date.
A further 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.
HMRC intend to take a “light-touch approach” during the implementation of this new system of the late payment penalty regime during the first year of operation for both VAT and ITSA. Therefore, where a taxpayer is doing their best to comply, HMRC will not look to charge the first 2% penalty after 15 days, thus allowing the taxpayer time to contact HMRC before a penalty is charged. The first penalty charged will be charged at 4% on any tax still outstanding at 30 days.
A taxpayer will receive a penalty notice from HMRC where it is considered that a penalty charge has arisen. As with other tax penalties, a penalty will not apply where the taxpayer can show that they had a reasonable excuse. These penalties will also hold a right of appeal.
The interest rules for VAT will change for VAT accounting periods starting after April 2022 and will be similar to those currently in place for ITSA. In essence, where a payment is made after the due date, late payment interest will be charged from the date the payment was due, until the date the payment is received by HMRC.
Late payment interest will also apply to VAT returns, VAT amendments and assessments and VAT payments on account.
In turn, HMRC will also pay repayment interest on any overpaid VAT and/or refunds due to be repaid. However, where a VAT repayment return has been received HMRC will not pay interest;
- for periods of reasonable enquiry where a full response has not been received
- where there are any outstanding returns for other prescribed accounting periods
- where security has been requested and not provided
The reforms look to introduce a more common approach across VAT and ITSA as currently the penalty regimes in place across the different taxes are inconsistent and similar behaviour can be treated differently by HMRC.
Whilst these changes are not due to come into effect until April 2022 for VAT and a year later for ITSA, these new regimes represent a significant change for taxpayers and they will need to understand their responsibilities to avoid falling foul of the new penalty regimes.
The new regime is designed so that it can be applied to other taxes with regular payment and submission obligations. Therefore these changes may, at some future time, be applied across other tax areas.