On 3 March the government confirmed it will reform the penalty and interest regimes for VAT and income tax self assessment (ITSA). The measures will bring significant changes and will first apply to VAT returns from April 2022 before being extended to ITSA returns.
Although not mentioned in the Chancellor’s speech, the government is introducing a new penalty regime for late submission of tax returns and late payment of tax, as well as harmonising interest rules across different taxes. The government estimates that the measures will raise £155m per year by 2024/25 so the impact will be felt by taxpayers.
The changes follow consultation in 2016 to 2018 and Finance Bill 2021 (FB 2021), due to be published on Thursday 11 March 2021, will include an updated version of the draft legislation published in 2018.
The changes, summarised below, will have significant implications for taxpayers and agents and ICAEW’s Tax Faculty will cover them in more detail in future.
Late-submission penalties
FB 2021 will include provisions introducing new penalties for late submission of tax returns.
The start dates for the new penalty regime are as follows:
- VAT – periods starting on or after 1 April 2022.
- MTD ITSA – accounting periods beginning on or after 6 April 2023.
- Other ITSA taxpayers – accounting periods beginning on or after 6 April 2024.
Taxpayers will not be charged an automatic financial penalty if they fail to meet a submission obligation. Instead, they will incur a penalty point for each missed submission obligation and a financial penalty will only be levied once the taxpayer reaches a penalty points threshold. The threshold varies depending on frequency of the obligation (monthly, quarterly, annual) and the penalty has been set at £200.
The points system will be applied separately to each tax and it will be possible to appeal against penalty points as they are incurred. The points will expire after a period of full compliance of up to 24 months.
Late-payment penalties
FB 2021 will include provisions introducing new penalties for late payment of tax and harmonising interest rules across different taxes.
The reforms come into effect:
- VAT – periods starting on or after 1 April 2022.
- MTD ITSA – accounting periods beginning on or after 6 April 2023.
- Other ITSA taxpayers – accounting periods beginning on or after 6 April 2024.
Two late-payment penalties may apply. A first penalty of 2% of the unpaid tax is charged on tax unpaid 15 days after the due date, increasing to 4% if the tax remains unpaid 30 days from the due date.
An additional penalty at an annualised penalty rate of 4% will accrue on a daily basis on tax remaining unpaid after 30 days.
The penalties will not be levied if the taxpayer has contacted HMRC to arrange time to pay by the trigger date for the penalty, so long as the taxpayer ultimately agrees the time-to-pay arrangement.
HMRC has confirmed it will take a “light-touch approach” to the 15-day element of the regime in its first year of operation for both VAT and ITSA. It states: “Where a customer makes reasonable efforts to get in touch with HMRC, we will not charge late-payment penalties on tax paid up to 30 days late in the first year.”
Despite this promise the Tax Faculty remains concerned about the impact of the changes. Lack of awareness of the current late-payment penalty regime was evident in the recent discussions about the January 2021 self assessment deadline. The faculty believes that the proposed late-payment penalty regime is even more complex and difficult to communicate and will make further representations.
Interest harmonisation
The interest harmonisation rules broadly bring the VAT rules into line with the current rules for income tax.
Impact of reform
These changes start to give us the framework for MTD ITSA penalties although they only cover submission and payment and not penalties for record keeping which is another essential element of MTD.
VAT default surcharge and repayment supplement will no longer apply when they are replaced by the new late submission and payment penalties and interest is harmonised. The current penalties that apply to MTD for VAT are explained in guidance on icaew.com/MTD.
A similar regime may be introduced for other taxes with regular submission obligations (eg, corporation tax) in the future.
More support on tax
ICAEW's Tax Faculty provides technical guidance and practical support on tax practice and policy. You can sign up to the Tax Faculty's free enewsletter (TAXwire) which provides weekly updates on developments in tax.
Sign up for TAXwireJoin the Tax FacultyTax Faculty
This guidance is created by the Tax Faculty, recognised internationally as a leading authority and source of expertise on taxation. The Faculty is the voice of tax for ICAEW, responsible for all submissions to the tax authorities. Join the Faculty for expert guidance and support enabling you to provide the best advice on tax to your clients or business.