Penalties for late submission and late tax payments will be determined by a new points system to make them fairer and more consistent, HM Revenue & Customs (HMRC) has announced.
Under the new system, penalties will be points-based rather than automatic. This means that those who consistently miss deadlines will accrue more points – and pay a larger fine than the penalty currently in force.
It is designed to penalise only the small minority of businesses and taxpayers who persistently miss their submission obligations rather than those who make occasional mistakes. The changes only initially apply to VAT and Income Tax Self-Assessment (ITSA).
The changes apply to VAT for accounting periods beginning on or after 1 April 2022 and to ITSA taxpayers with business or property income over £10,000 per year (who will be required to submit digital quarterly updates through Making Tax Digital (MTD) for Income Tax) for accounting periods beginning on or after 6 April 2023, and to all other ITSA taxpayers for accounting periods beginning on or after for 6 April 2024.
Instead of getting an automatic fine, under the new system, you will get a penalty point.
The more deadlines you miss, the more points you get until you reach your penalty threshold. Then you get a £200 fine (and another £200 fine for every subsequent deadline you miss).
Your penalty threshold depends on how often you have to submit tax information:
- annually – two points
- quarterly (e.g., VAT and Making Tax Digital for Self-Assessment) – four points
- monthly – five points
There are separate points totals for each obligation you have. This means that if you fail to meet one obligation but successfully meet others, you will only accrue one set of points.
But if you fail to meet multiple obligations, points will accrue for each – even if they have the same submission frequency. This could result in heavy fines if you consistently miss deadlines across all of your responsibilities.
HMRC has a time limit to apply points, for example, it cannot apply a point after 48 weeks from the day of a missed annual submission. It also has discretionary powers not to issue points and penalties under particular circumstances.
You can appeal an HMRC point or penalty as long as you have a reasonable excuse. If you have concerns about the new system, you should seek professional advice to avoid financial penalties.