Under new rules set by the Government, the system of penalties for VAT and Income Tax Self-Assessment (ITSA) are changing.
The new system of fines is aimed at tackling non-compliance by taxpayers who repeatedly fail to meet their obligations to provide returns and other information requested by HMRC. Those who make occasional and infrequent mistakes will be less likely to be penalised.
It will see the current system of automatic financial penalties removed and a new points-based system implemented, which will require taxpayers to incur a certain number of points for missed obligations before a financial penalty is issued.
The changes were initially meant to apply to VAT customers for accounting periods beginning on or after 1 April 2022, before being introduced later to ITSA customers with business or property income over £10,000 per year, who are mandated for Making Tax Digital (MTD) for ITSA, from the tax year beginning 6 April 2024, and for all other ITSA customers from the tax year beginning 6 April 2025. However, now the new rules for VAT will be delayed until 1 January 2023.
What will be considered a late submission?
The new rules are part of the ongoing implementation of MTD, which requires taxpayers to submit tax information digitally each quarter using compliant software.
Late submission under the new rules will be a failure to provide either a quarterly MTD update or an annual return on time.
However, it will not apply to other occasional submissions to HMRC, which will continue to be covered by the current penalty regime for the relevant submission.
How do the new late submission penalties work?
Every time you miss a submission deadline you will receive a point, which HMRC will notify you of on each occasion.
After you receive a certain number of points an initial financial penalty of £200 will be charged. The threshold that must be reached for a penalty to be issued is determined by how often a taxpayer is required to make their submission.
However, not only will a penalty be charged for that failure but every subsequent failure to make a submission on time. This means that those who continually fail to meet their obligations could face big fines.
The penalty thresholds are as follows:
|Submission frequency||Penalty threshold|
|Quarterly (including MTD for ITSA)||4 points|
The points are only applied to each type of submission you need to make, as you will only have points totals for each obligation.
That means if you miss two deadlines for separate submissions in the same month, you will be penalised separately for each submission type.
It is only where you regularly miss consecutive deadlines for a single type of submission that you will begin to accrue points that lead to a fine.
In general, if a taxpayer makes two or more failures relating to the same submission obligation in the same month, they will only incur a single point for that month.
This is to prevent a taxpayer reaching the points threshold too rapidly to be able to improve their compliance. However, there are exceptions to this rule, which can be found here.
Are late submission penalty points retained over time?
The points that are issued only have a lifetime of two years, after which they expire to prevent historic failures combining with occasional recent failures resulting in a fine. This period begins the month after the month in which the failure occurred.
Points will not expire when a taxpayer is at the penalty threshold. This ensures they must achieve a period of compliance to reset their points.
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 of the following conditions:
- A period of compliance; and
- The taxpayer has provided all submissions due within the preceding 24 months (It does not matter whether these submissions were initially late).
Both requirements must be met before points can be reset. The periods of compliance are:
|Submission frequency||Period of compliance|
|Quarterly (including MTD for ITSA)||12 months|
If a taxpayer is at the penalty threshold and has achieved the period of compliance, but has not submitted outstanding submissions, they will remain at the penalty threshold and continue to be charged penalties for any further failures to make submissions on time.
There will be time limits after which a point cannot be levied. The time limits for levying a point depend on the taxpayer’s submission frequency and start from the day on which the failure occurred, as follows:
|Submission frequency||Time limit for levying a point|
|Quarterly (including Making Tax Digital)||11 weeks|
The time limit for HMRC to assess a financial penalty will be two years after the failure which gave rise to the penalty.
Can I appeal the issuing of a penalty point?
You can challenge a point or penalty issued by HMRC through its internal review process or via an appeal to the First Tier Tax Tribunal.
To appeal the issuing of points or a penalty you will need to be able to prove you had a reasonable excuse for missing a filing deadline, this could include bereavement or illness.
The appeal process will be the same as the appeal process against an assessment of tax for the relevant tax on which the penalty is based.
Here to help
Although this guidance covers the basics of these upcoming changes there are additional rules that may affect how penalty points are issued against you or your business.