Tax Penalties

The way HMRC calculates tax penalties is about to change. The changes will initially apply to VAT and Income Tax Self Assessment (ITSA). HMRC say this is to make tax penalties ‘fairer and more consistent across taxes’.

When Do Tax Penalties Change?

• for VAT taxpayers from periods starting on or after 1 April 2022
• for taxpayers in Income Tax Self Assessment (ITSA), from accounting periods beginning on or after 6 April 2023 for taxpayers with business or property income over £10,000 per year (that is, taxpayers who are required to submit digital quarterly updates through Making Tax Digital for ITSA)
• for all other ITSA taxpayers, from accounting periods beginning on or after 6 April 2024

The new late submission penalties will affect those who fail to file returns and other information to HMRC on time. Taxpayers will no longer receive an automatic financial penalty if they fail to meet a deadline. Instead, they will incur a certain number of points for missed obligations before a financial penalty is levied. This new points-based regime is designed to  penalize ‘only the small minority who persistently miss their submission obligations rather than those who make occasional mistakes’.

Late Submission Penalties

Taxpayers will receive a point every time they miss a regular submission deadline and this will be notified to them by HMRC each time. After a number of points, a financial penalty of £200 will be charged and the taxpayer will be notified. Once the relevant threshold, as determined by their submission frequency, is reached a penalty will be charged for that failure and every subsequent failure to make a submission on time, but their points total will not increase.

Taxpayers will have one points total for each submission obligation they have. For example, if a taxpayer is required to provide an annual tax return (ITSA) and quarterly VAT returns, they will have separate points totals for ITSA and VAT. If both returns are late, a point will be applied to the points total to which the return relates: one for the group of annual returns for the late ITSA return, and one for the group of quarterly returns for the late VAT return. If both returns had an annual submission frequency, there will still be two separate points totals, one for ITSA and one for VAT, and the taxpayer will incur a single point for each if both returns are late.

Expiry of individual points

Points will expire in one of two ways:

Over Time

Points will have a lifetime of two years, calculated from the month after the month in which the failure occurred, after which they will expire. Points will not expire when a taxpayer is at the penalty threshold. This ensures they must achieve a period of compliance to reset their point

After a period of compliance

After a taxpayer has reached the penalty threshold, all the points accrued within that points total will be reset to zero when the taxpayer has met both the following conditions:

• A period of compliance (that is, meeting all submission obligations on time for the period of compliance – see table below); and
• The taxpayer has submitted all the submissions which were due within the preceding 24 months. It does not matter whether or not these submissions were initially late.

Both requirements must be met before points can be reset.

Further details can be found on the HMRC website where you can find out more about the various thresholds for the new taxpenalties.