As part of the detail released for Budget 2021, the Government confirmed a reform to interest and penalties for late filings and tax payments under the income tax and VAT regimes.
A new penalty points-based system will be introduced for late submission of VAT and income tax returns. This system will mean that taxpayers will not automatically receive a penalty from the first time that they file a return late.
A £200 late filing penalty will instead apply after a points threshold has been reached. One point is incurred for each late filing and the points threshold at which the penalty is applied will depend on the frequency of the return filings. For annual filings, the £200 penalty would apply after the second late filing within a 24-month period, with a four points threshold for quarterly filings and five for monthly filings.
If a further late filing is made whilst still above the points threshold, another late filing penalty will be triggered. Once compliance has been achieved for a set period of time (again, depending on the filings frequency) the points will be reset.
These rules will replace the existing default surcharge regime for VAT and the £100 automatic late filing penalty for income tax.
| Payment date
| Up to 15 days after the deadline
| First late payment penalty:
| Between 16 – 30 days late
|| 2% of the outstanding liability
| OR: more than 30 days late
|| 4% of the outstanding liability
| Second late payment penalty:
| More than 31 days late (calculated on a daily basis)
|| 4% per annum
If a reasonable excuse is accepted by HMRC for late payment or a time to pay arrangement is put in place, a penalty could be avoided.
Interest payments on outstanding VAT liabilities will be brought in line with those for income tax. Late payment interest will be charged on any payments from the date due until the date payment is received. Similarly, HMRC will pay repayment interest on any overpaid tax or refunds due to be repaid.
When will the new rules apply from?
These new rules will apply to VAT taxpayers for accounting periods beginning on or after 1 April 2022.
For income tax, the rules will apply in line with the introduction of making tax digital. For taxpayers with business or property income of more than £10,000, the new rules will apply from 6 April 2023. For all other income taxpayers, the rules will come into effect from 6 April 2024.