The Finance Bill 2021 heralds the introduction of a new penalty regime covering:
- VAT for periods starting on or after 1 April 2022;
- Income tax self assessment taxpayers with business or property income over £10k per year who are in MTD for Income Tax Self Assessment, for accounting periods beginning on or after 6 April 2023; and
- All other income tax self assessment taxpayers for accounting periods beginning on or after 6 April 2024.
The new system will feature a "points based approach", in general terms penalising more heavily those who persistently file returns or pay tax late, but being more lenient on those who make only an occasional slip up.
Late submission penalties
Under the new scheme a taxpayer who misses a submission deadline will be notified by HMRC that they have received a "penalty point". Points accrue separately for income tax and VAT and if a taxpayer accumulates a threshold number of points they receive a fixed financial penalty of £200.
If a taxpayer who has received a fixed financial penalty continues to miss submission deadlines, they will be liable to receive a further fixed penalty for each additional missed obligation, even if they have paid the fixed rate penalty.
HMRC has discretion and the taxpayer will be able to request a review or appeal against points and fixed penalties.
Points accumulated under the new system will not live on indefinitely; generally they will expire roughly 24 months after issue, provided that the taxpayer remains below the points threshold. If the taxpayer has reached the penalty threshold then all points will expire after the taxpayer has met their submission obligations for a set period of time, and all submissions that were due within the preceding 24 months have been made.
HMRC can also levy points where it "discovers" previous submission obligations that have not been met.
Late payment penalties
New late payment penalties will also apply to VAT and income tax payers. The penalties consist of a first penalty; and an additional penalty, with an annualised penalty rate:
- A taxpayer will not incur a penalty if the outstanding tax is paid within 15 days of the due date;
- After day 15 the penalty is set at 2% of the outstanding tax;
- After day 30 the penalty is set at 4% of the outstanding tax;
- After day 31 an additional penalty is set on outstanding tax, which accrues on a daily basis at 4% of the outstanding amount. This penalty stops accruing when the tax is paid.
Where a Time to Pay arrangement is agreed with HMRC, no further penalty should accrue provided the taxpayer then honours the terms of the arrangement.
HMRC has said that it will take a "light touch" approach in the first year of operation, during which time they will not assess the 2% penalty, so the first penalty that would be charged would be the 4% rate at day 30.
Again the taxpayer may request a review or appeal to the First Tier Tribunal.
HMRC will charge interest on tax that is outstanding after the due date, irrespective of whether any points or penalties have been issued. This applies even where a Time to Pay arrangement is in place.
The rate of interest will be 2.5% above Bank of England base rate. The rate of interest receivable by the taxpayer in respect of overpaid tax is, unsurprisingly, rather lower - 1% less than base rate, with a minimum rate of 0.5%.