CIOT welcomes clarity over new penalty regime and a light touch approach for late payments

3 Mar 2021

The Chartered Institute of Taxation has welcomed today’s announcement which clarifies the introduction of the new, harmonised interest and penalties rules for the late submission and/or late payment of VAT and income tax returns. CIOT is also pleased to see confirmation that a light touch will apply initially for certain late payments of tax under the new regime.

The new rules help redress the imbalance in the existing regime where occasional errors by otherwise compliant taxpayers are subject to the same financial penalties as the minority of taxpayers with persistent poor compliance. HMRC consulted with stakeholders several times in relation to these proposals, but have been in ‘limbo’ for some time. Today’s announcements bring certainty over their introduction.

The reforms cover two areas of non-compliance:

  • Late payment of tax due to HMRC – the new rules will introduce penalties calculated on the amount of tax outstanding and how long the late payment is overdue1
  • Late submissions of tax returns - the reformed late submission rules are a penalty points-based system2

Commenting on the new late payment rules, CIOT Director of Public Policy, John Cullinane, said:

“The CIOT welcomes the harmonisation of interest rules between VAT and income tax self-assessment (ITSA) and that HMRC will apply a light-touch for the two per cent penalty in the first year of its operation for both VAT and ITSA. This will allow otherwise compliant taxpayers enough time to adjust to the new rules.

“We remain concerned at the removal of the VAT repayment supplement, which acts as a useful ‘stick’ to ensure HMRC make timely repayments of VAT, which often form part of a business’s working capital.”

On the new penalty regime around late submission of tax returns, John Cullinane commented:

“In its policy paper ‘Penalties for late submission’3, HMRC state that they have discretionary powers not to apply a point or penalty on late submissions in relation to an individual taxpayer or group of taxpayers, depending on the particular circumstances. Whilst the new system allows for a modest amount of non-compliance before a penalty is levied, we would like to see a similar light touch considered for late submissions of VAT returns by the group of taxpayers newly mandated into Making Tax Digital for VAT from VAT return periods commencing on 1 April 2022.4 This will provide a similar light touch which benefited taxpayers mandated for MTD for VAT from 1 April 2019.”

The reforms will come into effect:

  • for VAT return periods starting on or after 1 April 2022;
  • for ITSA where there is business or property income over £10,000 per year, from accounting periods beginning on or after 6 April 2023;
  • for all other ITSA taxpayers, from accounting periods beginning on or after 6 April 2024.

Notes 

1. Late payment of tax due to HMRC

The late payment regime will introduce penalties calculated on the amount of tax outstanding and how long the late payment is overdue. No penalty will be due if the taxpayer pays the tax within 15 days of the due date; a 2% penalty is due if the payment is between 16 days and 30 days late; and a 4% penalty is applied for unpaid balances outstanding over 30 days late.

A second penalty will also become due on balances owed after 30 days and this will accrue on a daily basis. Penalties should not apply where the taxpayer will be late in paying but has approached HMRC to agree a ‘Time to Pay Arrangement’ and the payment terms of that agreement are subsequently met.

The rules for charging interest on unpaid VAT will become similar to the ITSA rules, which include applying interest from the date that the VAT payment was due, until the date the payment is received, and HMRC will pay repayment interest on any overpaid VAT and/or VAT refunds due to be repaid. The VAT repayment supplement is being withdrawn.

2. Late submissions of tax returns

The reformed late submission rules are a penalty points-based system. A penalty of £200 for late submissions will only be issued when the relevant points threshold is reached. Points accrue separately for VAT and ITSA and the points threshold depends on the taxpayer’s submission frequency: Annually = 2 points, quarterly = 4 Points, and monthly = 5 Points. Penalty points will have an expiration period up to a maximum of 24 months.

3. See the HMRC policy paper: Penalties for late submission – gov.uk

4. See the HMRC policy paper: Extension of making tax digital for VAT - gov.uk