Changes to HMRC Late Payment Penalty Scheme
As anticipated, the Government has now implemented promised reforms to sanctions affecting late filing of Tax Returns and late payments.
Initially, the reforms apply to VAT and Income Tax Self-Assessment.
Tim Thompson and John Veale of Kangs Solicitors outline the reforms.
The Old Scheme | Kangs Tax Solicitors
VAT – Surcharges
HMRC deems a business to have defaulted if it:
- does not file a VAT Return by the stipulated deadline; and/or
- fails to pay its VAT liability by the due date.
Once deemed to be a defaulter, the business will be at risk of HMRC applying surcharges and penalties.
The following table shows how much a business would have been charged if it defaulted within a surcharge period.
Upon first default by a business, no surcharge will apply but it will enter a twelve months surcharge period.
| Defaults within 12 months | Surcharge if annual turnover is less than £150,000 | Surcharge if annual turnover is £150,000 or more |
| 2nd | No surcharge | 2% (no surcharge if this is less than £400) |
| 3rd | 2% (no surcharge if this is less than £400) | 5% (no surcharge if this is less than £400) |
| 4th | 5% (no surcharge if this is less than £400) | 10% or £30 (whichever is more) |
| 5th | 10% or £30 (whichever is more) | 15% or £30 (whichever is more) |
| 6 or more | 15% or £30 (whichever is more) | 15% or £30 (whichever is more) |
VAT – Penalties
HMRC can charge a penalty of up to:
- 100% of any tax under-stated or over-claimed if a return contains a careless or deliberate inaccuracy,
- 30% of an assessment, if HMRC sends one that is too low and the recipient fails to point out the error within 30 days,
- £400 if a paper VAT return is submitted, unless HMRC has previously confirmed exemption from submitting a VAT Online Return account or Making Tax Digital compatible software.
Income Tax
Currently, HMRC can apply a penalty for failure to comply with such obligations which may result in, for example:
- late payment,
- late filing of a return,
- failure to notify HMRC about changes affecting tax liability, or
- errors appearing on a tax return, which understates or misrepresents tax liability unless it can be shown that reasonable care was taken.
Late payment penalties for income tax occur:
- after payment becomes 30 days late = 5% of tax outstanding,
- 5 months after above charge (6 months late) = a further 5% of tax outstanding,
- 6 months after above charge (12 months late) = a further 5% of tax outstanding.
For filing of a late return, even in circumstances where no tax is due, the following standard penalties apply:
- £100: applied immediately the form is late,
- £10 per day: charged once the return is 3 months late, for a maximum of 90 days,
- the higher of £300 or 5% of the tax due: applied if the form is 6 months late, and
- a further £300 or 5% of the tax due (whichever is higher): applied if the form is 12 months late.
In circumstances, where the tax payer failed to notify HMRC of changes or where errors are made, penalties are applied dependent upon the behaviour of the tax payer:
| Reason for failure to notify | Type of disclosure | Penalty |
| Reasonable excuse | No penalty | |
| Not deliberate | Unprompted | 0%-30% within 12 months: after that 10%-30% |
| Not deliberate | Prompted | 0%-30% within 12 months; after that 20%-30% |
| Deliberate | Unprompted | 20%-70% |
| Deliberate | Prompted | 35%-70% |
| Deliberate and concealed | Unprompted | 30%-100% |
| Deliberate and concealed | Prompted | 50%-100% |
The Changes | Kangs Tax Investigations Lawyers
The changes affecting late submissions and late payments are designed to make the system more consistent across all taxes and will initially apply to VAT and Income Tax Self -Assessment (‘ITSA’).
In place of the issue of an automatic financial penalty for failing to meet a submission deadline or payment deadline, there will be a system of penalty points that will accumulate before a financial penalty is applied. The new system is designed to penalise persistent offenders rather than those who have made a genuine mistake.
The system will police taxes that require regular submissions. Other taxes that require a ‘one off’ payment will be covered by the relevant current regime.
The changes will apply to:
- VAT customers for accounting periods beginning on or after 1 January 2023.
- ITSA customers with business or property income over £10,000 per year who are required to use Making Tax Digital (MTD) (for ITSA) from the tax year beginning 6 April 2024.
- All other ITSA customers from the tax year beginning 6 April 2025.
The changes will make minor changes to and replace the penalty for deliberately withholding ITSA as set out by the Finance Act 2009, in order to bring it in line with the new points-based system.
How the new ‘Late Submission’ penalties will work.
Every time a submission is missed, a point will be applied and HMRC will notify the taxpayer accordingly. There will be a certain threshold of points when a financial penalty of £200 will be charged and the taxpayer notified accordingly. The threshold will depend on how often a taxpayer is required to make their submission.
Once a penalty has been paid, if there are further late submissions, there will be further penalties to pay but the points total will not continue to increase.
The penalty thresholds will be as follows:
| Submission Frequency | Penalty Threshold |
| Annual | 2 points |
| Quarterly (MTD and ITSA) | 4 points |
| Monthly | 5 points |
Separate Points Totals
For each tax obligation that a tax payer has, there will be a separate points total.
If the taxpayer has, for example, to pay VAT and ITSA, there will be separate totals for both. If both returns are submitted late, a point will be added to the total for VAT and ITSA.
Therefore, if both had to be submitted on an annual basis, there would be 1 point applied to each, still making 2 in all.
More Than One Failure in a Month
In order to prevent a taxpayer from reaching their points threshold too quickly, and to help improve their compliance, two or more failures in the same month relating to the same tax obligation will only result in one point.
However, this will not apply across different digital submissions obligations for ITSA. If there are quarterly deadlines, end of period statements and final declaration deadlines all due in the same month and they are all missed, this will result in three points.
If a taxpayer with MTD for ITSA obligations has two or more businesses and therefore has to submit separate regular updates and end of period statements for each business, there will be one points total for all those businesses. If late submitting one or more of each type of submission, they will only accumulate one point for that type of submission across all the businesses.
Expiry of Individual Points Over Time
To prevent past points combining with new failures to make fresh penalties, points will have a limited lifetime of two years counting from the month after the month in which the failure occurred. Points will not expire if the taxpayer is at the penalty threshold, thus there will have to be a period of compliance to wipe the slate clean.
If a taxpayer has reached the penalty threshold, all the points accrued within that points total will be reset to zero when the taxpayer achieves a period of compliance and has made all required submissions that were due in the proceeding 24 months, whether they were initially late or not.
Compliance Periods
| Submissions frequency | Period of compliance |
| Annual | 24 months |
| Quarterly (including MTD for ITSA) | 12 months |
| Monthly | 6 months |
If submissions remain outstanding and the taxpayer is at the penalty threshold, even though the period of compliance has been achieved, the taxpayer will remain at the threshold and will still have to pay penalties for further failures.
There will be time limits after which a point cannot be applied depending on submission frequency and that run from the day that the failure occurred.
| Submission frequency | Time limit for applying a point |
| Annual | 48 weeks |
| Quarterly (including MTD for ITSA) | 11 weeks |
| Monthly | 2 weeks |
HMRC has two years after the failure which gave rise to the penalty to assess that penalty.
Where a Tribunal decision results in the cancellation of a point or a financial penalty, HMRC will have 12 months from the date of the Tribunal decision to levy a point or financial penalty that would have applied for failures that occurred but were not added to the points total because the taxpayer was at the penalty threshold.
If HMRC discovers that a customer had previous submission obligations of which HMRC was unaware of at the time, HMRC will also have 12 months from the date of the discovery to apply points and financial penalties.
HMRC has discretionary power not to apply a point or charge a penalty to an individual taxpayer or a group of taxpayers. However, when HMRC has already applied a point or penalty, taxpayers must use the appeal process, either through the internal HMRC review or to the First-Tier Tax Tribunal.
Changing Frequency of Reporting
Should the tax payer be required to change the frequency that they submit returns or apply to do so, for example being required to submit monthly rather than quarterly VAT returns, there is a system in place to avoid them being penalised.
The adjustments made are to be as follows:
| Change in Reporting Frequency | Adjustment to points total |
| Annual to quarterly | +2 points |
| Annual to monthly | +3 points |
| Quarterly to annual | -2 points |
| Quarterly to monthly | +1 point |
| Monthly to annual | -3 points |
| Monthly to quarterly | -1 point |
As a taxpayer cannot have a negative number of points, if the adjustment would lead to a negative number, the taxpayer will be deemed to have zero points.
Where points are deducted from the total, it is the most recent points that will remain and relevant time limits will be calculated from the most recent points accordingly.
Where points are added to the total, they will be treated as having been incurred at the same time as the most recent existing point. Relevant time limits will be calculated from the most recent point accordingly.
VAT Groups
If a VAT group has incurred penalty points and a representative member of that group is replaced, the new member will be treated as having the same number of penalty points as the previous member and the points for the whole group will remain unchanged.
If a member leaves the group and goes on to have a new VAT registration, they will start with zero points and the same applies to a new VAT group, if any of the group previously had points these will not be applied to the new group.
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