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Late submission penalties 

A points-based Late submission penalty regime will replace existing late submission penalties for VAT and Income Tax. 

This measure was consulted on in 2018, see Penalties: Making Tax Digital

  • When a taxpayer misses a submission deadline, they will incur a point. 
    • Points accrue separately for VAT and Income Tax. 
  • A penalty of £200 is charged when the taxpayer reaches a points threshold based on the taxpayer's submission frequency: 
    • Annual: Two points
    • Quarterly: Four points
    • Monthly: Five points
  • Accrued points expire after 24 months where the taxpayer remains below the points threshold. 
  • When a points threshold is reached, all points will expire after the taxpayer has met their return obligations for a set period based on their submission frequency:
    • Annual: 24 months
    • Quarterly: 12 months
    • Monthly: Six months
    • And all returns due within the preceding 24 months have been received by HMRC.
  • Where a taxpayer continues to miss submission deadlines after reaching the points threshold (and a penalty has been charged) they will be liable for a further fixed penalty for each missed obligation. 
  • Penalties will not be charged, or points recorded, where the taxpayer has a Reasonable excuse for not meeting the submission deadline. 
    • There will be a right to Appeal against points and penalties. 

Late payment penalties

The Late payment penalty regime will be aligned across the main taxes. 

  • A first late payment penalty will be payable 30 days after the payment due date based on a percentage of the balance outstanding. 
    • No penalty will be payable if the tax is paid within 15 days of the due date. 
    • Tax unpaid after day 15 will attract a 2% penalty. 
    • Where tax is unpaid by day 30, the penalty increases to 4%.
  • From day 31, a second late payment penalty is charged at 4% per annum, accruing on a daily basis based on amounts outstanding. 
  • Penalties will stop accruing where a Time To Pay agreement is reached. 
  • Penalties will not be charged where the taxpayer has a reasonable excuse for not making payment on time. 
    • There will be a right to appeal against points and penalties. 

Implementation 

The new late payment and late submission penalty rules will apply as follows:

  • VAT: accounting periods beginning on or after 1 April 2022.
  • Income Tax (where business or property income is over £10,000): accounting periods beginning on or after 6 April 2024 (delayed by one year).
  • All other Income Tax taxpayers: accounting periods beginning on or after 6 April 2025 (delayed by one year0. 

HMRC will take a light-touch approach to the initial 2% late payment penalty for taxpayers in the first year of operation of the new system for VAT and Income Tax.

In the first year, HMRC will not assess the first penalty at 2% after 15 days where a taxpayer is doing their best to comply.

Interest harmonisation 

New legislation will align the interest rules for VAT with those for Income Tax from April 2022. 

  • Where VAT is paid after the due date, late payment interest will be payable from the date that payment became due until the date it is received by HMRC.
    • Late payment interest will also apply to VAT amendments, assessments and payments on account. 
  • HMRC will pay repayment interest on overpaid tax and refunds due to be repaid. 
    • Repayment interest will be due from the later of the last day the payment was due to be received or the day it was received until the date the repayment to the taxpayer is authorised or offset.
  • Where a VAT repayment return has been received, HMRC will not pay interest:
    • For periods of reasonable enquiry where a full response has been received.
    • For periods where HMRC needs to correct errors or omissions in the return.
    • Where security has been requested and not provided.

Useful guides on this topic

Budget 2021: Subscriber guide
A detailed guide with links to more detail on all the key topics for SMEs and their owners.

Penalties: Late Filing
Late returns can be subject to a mix of fixed and tax geared penalties. What penalties apply for late filing? Which penalty will apply and when? 

Penalties: Late Payment (Subscriber guide)
What penalties are charged when tax is paid late? A guide for Subscribers.

Grounds for Appeal: Reasonable excuse
What is considered to be a 'reasonable excuse' when a taxpayer makes an appeal against a tax compliance failure?

Budget 2021: At a glance
A summary key budget announcements together with items published without announcement.

External link

Policy paper: Interest harmonisation and penalties for late payment and late submission

 

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