Finance Act 2021 introduces a new points-based penalty system for the late submission of VAT and income tax self assessment (ITSA) returns that are submitted regularly (monthly, quarterly and annually) and a new model for penalties relating to late payment of these taxes.  

Late submission penalties

Schedule 24 sets out the new penalty regime for the late submission of income tax and VAT returns. All references below are to Sch 24.

The new penalty regime is a points-based system. Each late submission will result in a point until the taxpayer has amassed a number of points equal to the points threshold in the table below, at which time a penalty will be charged (para 5(1) and para 15(2)). Once the penalty threshold is reached, further late submissions will not result in additional penalty points (para 5(8)), but will result in a penalty (para 15(3)).

The point thresholds are as follows:

Where a taxpayer changes the frequency of their filing obligation (for example, changing the filing for VAT returns between monthly, quarterly and annually), and they have outstanding unexpired points, then their points total will be increased if the filing obligation becomes more frequent and reduced if it becomes less frequent (para 10).

Where the taxpayer has not reached the threshold, points will expire after two years (para 7). Where the taxpayer has reached the penalty threshold, points will not expire after two years, but will endure until the taxpayer is fully compliant for a ‘period of compliance’ set out in the table below and has caught up with their filing obligations (para 8).

Making Tax Digital (MTD) ITSA updates are considered quarterly, but the end-of-year MTD submissions, such as the end of period statement and the final declaration, are expected to be considered annual obligations.

For each taxpayer, ITSA and VAT obligations will have separate points totals. Where a taxpayer has multiple businesses subject to the same filing obligation, they will receive a point for each return period in which a return is missed – regardless of how many of their businesses failed to file in the relevant period (para 4). For MTD quarterly updates where a person carries on more than one business, and those businesses file their quarterly updates in different months, only one point for quarterly filing failure will be levied per quarter – regardless of how many businesses fail to file their MTD quarterly report in the quarter (para 5(5) and para 15(5-9)). For this purpose, the MTD quarterly update, the end of period statement and the final declaration are considered different submission obligations.

The new regime has the usual bureaucratic requirements regarding how and when penalties must be levied in para 16 and para 17, and conditions under which a penalty or penalty point will not be due for a breach (para 19), and the appeals process (paras 22 and 23).

Under para 18, power is given to the Commissioners of HMRC to change the penalty thresholds, the necessary period of compliance before which points are reset to zero and the amount of the penalty. The changes would, however, need to be made by means of a statutory instrument approved by a resolution of the House of Commons, so they cannot be made without Parliamentary oversight.

Unlike the old regime, a failure by a partnership will not be considered a failure of each individual partner (para 25(1)) and instead will be deemed to be a failure of a single person resulting in a single penalty of £200, although each partner will be jointly and severally liable for the penalty (para 25(3)). A similar provision applies for trustees (para 26).

The new system is therefore much more complicated than the current system, and it results in double the basic penalty (£200 rather than the previous £100 penalty). However, penalties will not arise as a result of a single failure, which may assist taxpayers who are generally up to date with their compliance obligations.

Late payment penalties

Schedule 26 sets out a new penalty regime for the late payment of income tax and VAT. All references below are to Sch 26.

The new penalties are expected to have the same commencement dates as the late submission penalties in Sch 24.

Where full payment is made within 15 days of the payment date, no penalty is due; where payment is not made in full by this time, the penalty due is:

• 2% of the amount unpaid after 15 days (para 5(4));
• 2% of the amount unpaid after 30 days (para 5(5)); or
• 4% per annum of the unpaid amount after 30 days (para 8(3))

So, if a liability was not paid within 30 days, a 4% penalty would be levied, plus 4% per annum starting from 30 days from the payment date.

Where HMRC has been contacted to agree a time to pay arrangement, and it is subsequently adhered to, the above penalties will not be due (para 6). Where the time to pay agreement is broken, then for penalty purposes, it is treated as not having been made (para 7).

Paragraph 11 gives the Commissioners of HMRC the power to change the 15- and 30-day thresholds and the penalty percentages. Any such changes must be made by statutory instrument and approved by the House of Commons (para 22).

Compared to the old regime for income tax (5% penalty due on the outstanding amounts at 30 days, six months and 12 months from the due date), the new regime will generally result in lower amounts except where the tax is paid very late, as shown below.

Comparison with the current surcharge regime for VAT is more challenging. The present rules are that you get a default surcharge liability notice after the first default, but no penalty. After the second default, you receive a 2% penalty. The penalty is 5% after the third default, 10% after the fourth and 15% thereafter until the taxpayer has two complete years without a default, at which point they start again. To get a default, a taxpayer only has to be one day late in submitting a return or making a payment. 

For businesses with turnover under £150,000, an additional failure was required to get the stated surcharge percentages. The surcharge ‘de minimis’ amounts (£400 minimum surcharge to trigger a surcharge for three failures or less, minimum £30 surcharge for more than four failures) will no longer apply.

It should be noted that the 4% per annum penalty in para 8(3) will be charged on top of interest for late payment, currently running at 2.6% per annum for income tax and VAT.

The reasonable excuse provisions are in para 12 and are subject to special reduction at HMRC’s discretion in para 13; the appeals process is set out in para 19. The administrative mechanics of the penalties are set out in paras 16-18 and permit HMRC to issue regulations setting times or intervals before the end of a penalty period when a penalty may be levied (para 16(2)), and it is therefore to be expected that HMRC will charge interim penalties rather than wait for payment to be made before charging a ‘full and final’ penalty.

About the author

Andy Tall, Tax Partner, Greenback Alan LLP, and member of the Tax Faculty’s SME Business Tax and Compliance and Investigations Committees