HMRC introduces penalty regime for VAT and income tax self-assessment
The Finance Act 2021 introduces a new penalty regime for VAT and income tax self-assessment (ITSA).
Historically, VAT surcharges for late submission of VAT returns have been criticised for being disproportionate, and out of line with similar charges for other taxes. The surcharge level is currently the same (a fixed percentage of the VAT due, from 2% up to 15%) regardless of whether the VAT was paid 1 day or 1 year late.
HMRC are attempting to make the system fairer with the new regime.
What will the new late payment penalties regime look like?
VAT and income tax self-assessment
Under the new regime:
- Penalties will be points-based, with a financial penalty of £200 being issued for every missed submission on and after a relevant points threshold is reached
- Penalties will be proportionate to the amount of tax owed and how the late payment is
- No penalty will be chargeable on tax paid up to 15 days after the due date
- A 2% penalty will be chargeable on tax paid between 16 and 30 days after the due date increasing to a 4% penalty chargeable on tax unpaid after 30 days
- A further 4% annual penalty rate will be chargeable on outstanding tax due after 30 days
HMRC to adopt a light-touch approach
HMRC has confirmed that it will take a light-touch approach to the initial 2% late payment penalty for customers in the first year of operation of the new system under both VAT and income tax self-assessment.
HMRC said that, in the first year, where a taxpayer is doing their best to comply, it will not assess the first penalty at 2% after 15 days, allowing taxpayers 30 days to approach HMRC before it charges a penalty.
However, if a taxpayer has not approached HMRC by the end of Day 30 and there is still an amount of tax outstanding, the first penalty will be charged according to 2% of the amount outstanding at Day 15 plus 2% of what is still outstanding at Day 30. In most instances this will amount to a 4% penalty.
No penalty will be due if a taxpayer has a reasonable excuse for late payment and HMRC has discretionary powers to reduce or not to charge a penalty for late payment if it considers that appropriate in the circumstances.
When will the reforms come into effect?
The reforms come into effect:
- For VAT taxpayers from periods starting on or after 1 April 2022
- For taxpayers in income tax self-assessment, 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 income tax self-assessment taxpayers, from accounting periods beginning on or after 6 April 2024
The reforms, shaping a fairer system with reduced surcharge penalty percentages will be welcome to both taxpayers and advisers. With any new system, there are likely to be teething problems and businesses are advised to take advice if surcharges have been issued incorrectly.
Finally, it’s worth a reminder that under both the current and new regime, businesses that have received surcharges may be able to appeal. Our specialist VAT team can assist you make an appeal to HMRC, and have been successful in having default surcharges overturned.
The information was correct at time of publishing but may now be out of date.