HMRC’s New Penalty Regime

HMRC’s new points-based penalty regime for late submission and payment will start from 1 April 2022. The changes will apply in the first instance to the submission of VAT returns for VAT return periods beginning on or after 1 April 2022.

The penalty regime will then be extended to Making Tax Digital (MTD) Income Tax Self-Assessment (ITSA) accounting periods beginning on or after 6 April 2023. This will be in tandem with the extension of MTD (from the same date) for taxpayers with business or property income over £10,000 annually. The penalty scheme will be extended to all other ITSA taxpayers for accounting periods beginning on or after for 6 April 2024.

Under the new regime, taxpayers will incur a penalty point for each missed submission deadline. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The threshold varies depending on the required submission frequency (monthly, quarterly, annual). The penalty points will apply separately to VAT and ITSA. The penalty points will be reset to zero following a period of compliance by the taxpayer. There are also time limits after which a point cannot be levied.

In addition, the new system will see the introduction of two new late payment penalties. A first penalty of 2% of the unpaid tax that remains outstanding 15 days after the due date. The penalty increases to 4% of any tax still outstanding after 30 days. An additional or second penalty at a penalty rate of 4% per annum will accrue on a daily basis after 30 days. This additional penalty will stop accruing when the taxpayer pays the tax that is due.

There will be an appeals mechanism for both the late submission and late payment penalties available through an internal HMRC review process and an appeal to the First Tier Tax Tribunal.