The taxman has confirmed that its new penalty points system for late tax payers will come into effect for the new tax year in April 2022.

HM Revenue & Customs (HMRC) says the move is designed to iron out anomalies and show some leniency to taxpayers who generally obey the rules while targeting those who are persistent late payers.

The measure will affect those who are required to submit either a VAT Return or an Income Tax Self-Assessment (ITSA) return (or both)  and will also affect anyone working on behalf of taxpayers such as agents.

The new rules, confirmed last month, will replace what is currently in place and covers penalties for late payment and tax returns submission, and aims to harmonise late payment interest charges

HMRC also says that the current rules are inconsistent across major taxes, meaning it penalises the same behaviour in different ways.

The reforms will be introduced in a phased manner:

  • starting next year, it will cover VAT payers for periods on or after 1 April 2022
  • for ITSA taxpayers with business or property income over £10,000 per year (who are required to submit digital quarterly updates through Making Tax Digital for ITSA) it will cover accounting periods beginning on or after 6 April 2023
  • for all other ITSA taxpayers the accounting periods begin on or after 6 April 2024

Late submissions

The more deadlines you miss, the more penalty points you get, until you reach your penalty threshold. Then you get a £200 fine (and another £200 fine for every subsequent deadline you miss).

Your penalty threshold depends on how often you have to make a submission:

  • annually – two points
  • quarterly (e.g. VAT and Making Tax Digital for Self-Assessment) – four points
  • monthly – five points

There are separate points totals for each obligation you have. This means that if you fail to meet one obligation but successfully meet others, you will only accrue one set of points.

But if you fail to meet multiple obligations, points will accrue for each – even if they have the same submission frequency. This could result in heavy fines if you consistently miss deadlines across all of your responsibilities.

Late payments

Instead of getting an automatic fine, under the new system you will get a penalty point.

  • The first penalty is set at two per cent of the outstanding amount if they pay between 16 days and 30 days after the due date.
  • If there is any tax left unpaid 30 days after the due date it is set at two per cent of the outstanding amount at day 15 plus two per cent of the outstanding amount at day 30. In most instances this will amount to a four per cent charge at day 30.
  • A second late payment charge of four per cent per annum, calculated on a daily basis on the total unpaid tax, will be incurred from day 31.

Over a period of time penalty points, like driving penalty points, can come off but it is complicated.

To avoid penalty charges if you are having difficulty paying, you can approach HMRC to agree a ‘time to pay’ arrangement.

There is no penalty at all if the taxpayer pays the tax late but within 15 days of the due date, except for the first year where no levy will be incurred if the payment is made within 30 days.

Interest harmonisation

Interest will accrue on any late payment, regardless of penalties, from the tax due date until the date payment is received. Repayment Interest will be paid from the later of:

  • The due date of the return.
  • The date the return is submitted.

Seek help

If you are concerned about the impact of these changes to the penalty system, please speak to us.