HMRC Penalty changes

HMRC have announced that they will be introducing two new penalty regimes to encourage taxpayers to both file their returns and to pay their tax liability at the right time.  For VAT customers, the regimes will apply to businesses with VAT periods beginning on or after 01 April 2022.

For ITSA customers with business or property income over £10k the regimes will apply from the tax year beginning 06 April 2024.  This will be in line with the introduction of Making Tax Digital ITSA, real time information (RTI) reporting, which was due to start in April 2023, but which has been delayed by a year due to the COVID-19 pandemic.  It will apply to all other ITSA customers from the tax year beginning 06 April 2025.

Late Submission Penalties

These new penalties will affect those who fail to submit returns or requested information on time.

Instead of an automatic financial penalty, taxpayers will receive a point each time an obligation is missed.  Once they hit a set number of points (based upon the frequency of their submissions), they will receive a fine of £200.  For each subsequent late return, they will incur a further £200 fine.  Their points total will not increase.

There will be separate points for each obligation, i.e., VAT and ITSA will amass different points. 

The regime is designed to be kinder to people who make a one-off mistake, but to deter persistent offenders.

Generally, points will have a lifetime of two years, after which they will expire, and the taxpayer will return to zero points.  However, points will not expire if the taxpayer is at the penalty threshold.  In this situation, they must achieve a period of compliance in order to reset their points to zero.

The conditions of this period of compliance are:

·        All returns are submitted on time for a time period based upon their return submission frequency, and

·        All returns for the preceding 24 months must be submitted (even if late).

Both conditions must be met for the points to be reset.

The regime only applies to taxpayers who have a regular submission obligation.  It does not apply to one-off submissions.  These will continue to be covered under the old regime. 

Late Payment Penalties

This penalty will replace the default surcharge VAT regime.

There are two penalties which may occur

First Penalty

The taxpayer will not receive a penalty if payment is made within the first 15 days after the due date.  This is more time than currently allowed, following submission of your VAT return.

On day 15, the first penalty kicks in.  This is 2% of the amount outstanding.

If there is any amount still unpaid at day 30, the penalty is calculated as 2% of the amount outstanding at day 15 PLUS 2% of the amount outstanding at day 30.  In most cases this will be 4% of the amount owed at day 30.

Additional or Second Penalty

If tax remains unpaid on day 31, an additional penalty will be incurred.  This will accrue on a daily basis at the rate of 4% per annum on the outstanding amount.  The penalty will only stop accruing when the outstanding balance is paid.

Time to Pay Arrangements

When a time to pay arrangement is agreed with HMRC, the penalty will stop accruing.  The penalty will only remain paused as long as the taxpayer continues to honour the terms of the TTP agreement. 

Penalty Not Charged by HMRC

If HMRC agrees that the taxpayer has a reasonable excuse for the late payment of penalties, they will not charge a penalty.

Additionally, they will take a light touch approach to the late payment penalties in the first year of operation, as HMRC understands that this will be a significant change for some customers.

Should you require any further information on the new penalty regimes or need suuport with any VAT queries you may have, please contact our Tax Director, Mary Tierney on 0345 330 3200 or email