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The New penalty Regime for MTD for ITSA and VAT

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The new HMRC penalties cover late submission, late payment and interest harmonisation and unlike the old penalties you will now get points and penalties even if you owe no tax or are due a refund! there will be no soft-landing period.

The new penalties take effect:

  • for VAT taxpayers for their first VAT return period starting on or after 1st April 2022
  • for ITSA (Income tax and self-assessment) taxpayers within income over £10k subject to Making Tax Digital (MTD) for their first tax year or accounting period starting on or after 6th April 2023
  • for ITSA taxpayers with income below £10k starting 6th April 2024

In theory the penalties are fairer, but they can work out more expensive than the current penalties. The new system is based on points, each late return gets a penalty point which expire after 24 months. The points only apply to VAT and ITSA (not to other taxes at the moment)

Once the penalty threshold is reached there is a fixed penalty of £200 for each missed return, there is an appeals process.

Submission Frequency Penalty Threshold
Annual 2 points
Quarterly 4 points
Monthly 5 points

Total points will only be reset to zero once when the following 2 conditions are met

  1. A period of compliance based on their submission frequency
  2. All submissions that were due within the preceding 24 months have been submitted
Submission Frequency Period of Compliance
Annual 24 months
Quarterly 12 months
Monthly 6 months

Late Payment Penalty

Late Payment could potentially mean you get two penalties depending on when you pay! The first penalty will be levied 31 days after the payment due date and will be based on a set percentage of the balance outstanding. The second penalty will be calculated on amounts outstanding from day 31 until the principal balance is paid in full or a payment plan agreed. Time to Pay Payment plans suspend penalties.

HMRC will notify the penalties separately.

Penalty Days after payment due date Penalty charge
First Penalty 0 to 15 No penalty payable
16 to 29 Penalty calculated at 2% of what was outstanding at day 15
30 Penalty calculated at 2% of what was outstanding at day 15

Plus 2% of what is still outstanding at day 30

Second Penalty Day 31 plus Penalty calculated as a daily rate of 4% on APR for the duration of the outstanding balance

There will be a ‘period of familiarisation’ for the first year which is based on 30 days.

Interest Harmonisation

The VAT interest rules will change to be inline with ITSA

  • When an amount is not paid by the due date, late payment interest will be charged to the taxpayer from the date that the tax becomes overdue until the date payment is received
  • VAT Repayment Supplement will be replaced with Repayment Interest. Repayment Interest will be paid from the later of:
    • the due date of the return
    • the date the return is submitted

If HMRC owe you interest it will be paid at the Bank of England Base Rate -1% but if you owe HMRC interest its at the Bank of England base rate +2%.

Other things to note

  • The Gateway will tell you how many points you have
  • The Gateway will tell how penalties have been calculated
  • Agents will not be able to pay the penalties
  • When appealing you will need to say who was to blame for missing the deadline
  • When claiming the deadline was missed due to a health issue a declaration of honesty is required
Previous MTD filing to be extended to all VAT-registered traders from April 2022
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