This is a freeview 'At a glance' guide to penalties under the Making Tax Digital regime.

HMRC's Making Tax Digital (MTD) programme has resulted in a re-design of penalties for late filing and payment. Penalties and interest: key measures included in Budget 2021.

Subscribers see Penalties: points based system 

Late submission penalties 

Finance Bill 2021 proposes a points-based late filing penalty regime which will replace existing late filing penalties for VAT and Income Tax. 

This measure was consulted on in 2018, see Penalties: points based system

  • 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. 
  • The points threshold is based on the taxpayer's submission frequency. 
  • 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.
  • 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. 

Late payment penalties

An amended 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 remains 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. 

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 2023.
  • All other Income Tax taxpayers: accounting periods beginning on or after 6 April 2024. 

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.
  • HMRC will pay repayment interest on overpaid tax and refunds due to be repaid. 

Useful guides on this topic

Penalties: late submission (proposed points based)
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?


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