What you should know about the new HMRC penalty system for late submissions

HMRC has introduced a new points-based, late-submission penalty system – how well will it work?

HMRC is introducing a new points-based penalty system for late submissions, effective from April 2022 for VAT customers. For those submitting Income Tax Self Assessment (ITSA) and whose businesses and property income is over £10,000 per annum, the new system comes into effect from 6 April 2023. For all other ITSA submissions, the system will be effective from 6 April 2024.

The new system is intended to be fairer for those who occasionally miss deadlines, but cracks down on those who are consistently late with payments and submissions.

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Currently, late submissions and payments of VAT returns results in an automatic fine, known as a single default surcharge, which is a certain percentage of the VAT due on the return. First defaults on business accounts are liable for a 2 per cent surcharge, followed by 5 per cent, 10 per cent and up to a maximum of 15 per cent.

Although the amount is fixed and does not increase over time, nor is interest accrued on late payments, the fines can nevertheless be substantial.   

The new system, however, aims to bring VAT in line with existing penalty systems applied to direct tax returns.  

Here’s how it will work:

Late payments

There will be no penalty for late payments made within two weeks of the due date, but penalties will be applied in increasing amounts after this cut-off point.

  • 2 per cent penalty of money owed if the late payment is made between 16 and 30 days after the due date.
  • 4 per cent penalty of money owed if payment has not been made after 30 days.
  • A second penalty of an additional 4 per cent per year, calculated on a daily basis of total money owing will be incurred from day 31.

Taxpayers should approach HMRC directly to agree on a Time to Pay Arrangement if they are struggling to pay their tax. 

Late submissions

This is where the points system comes in.

  • Each submission obligation has its own separate points threshold, depending on the frequency of tax returns, as follows:
  • Annual submissions: two-point threshold
  • Quarterly submissions: four-point threshold
  • Monthly submissions: five-point threshold.
  • One point is accrued following a late submission.
  • Failure to meet one obligation but submitting on time for others will only accrue one point corresponding to the late or missed submission.
  • Once the points threshold of a submission obligation has been reached, a capped fine of £200 will be payable.
  • Further missed submission deadlines after a penalty fine has been issued will result in further penalties.
  • Penalty points will expire after two years, providing the account remains under the point threshold and current submission deadlines have been met.
  • If the points threshold has been reached, points will only be reset once all deadlines have been met for a particular time period:
  • Two years for annual submissions
  • 12 months for quarterly submissions
  • Six months for monthly submissions.
  • In addition, taxpayers will need to submit everything outstanding over the previous two years.

So, what do accountants think of the new points-based, late-submission penalty system?

A progressive scheme, which gives taxpayers the chance to improve

Ercan Demiralay, Partner, Wellers

The new system will make things fairer because where you make two late monthly submissions, you’ll only accrue one point; the idea being to provide taxpayers with a chance to improve and not suffer too many penalty points and hence financial consequences.

However, it will be tricky to explain the taxpayer’s penalty points position at any given time, and for those registered on numerous schemes, it might be difficult to keep up to date. An unforeseen event could trigger missing multiple returns/payments and hence points could rack up quickly and penalties payable could escalate.

Next steps: This is a progressive scheme encouraging clients to meet their deadlines and allowing the occasional delays that taxpayers may encounter. The message is still that clients should do their best to meet every deadline, as it is good practice and avoids uncertainty and unnecessary costs escalating.

Verdict: A progressive scheme, which will make things fairer overall.

This slap-on-the-wrist system could be effective – but we need consistency

Laurence Field, corporate and international tax partner, Crowe UK

A bit like getting punished for speeding, taxpayers will get points on their record for submitting returns late. Incur enough points and what do you get? Fines. HMRC is clearly trying to get more consistency into its penalty processes, as well as reducing the administrative burden by encouraging taxpayers to accept the slap on the wrist of penalty points, which doesn’t give rise to immediate fines. This latter element allows HMRC to encourage businesses to make improvements to their systems, without imposing an immediate penalty, but clearly with the threat that future transgressions could be costly. Clarity over process is no bad thing. Given that HMRC has discretion over when to issue points, the key will be ensuring that the discretion is exercised consistently. This may result in a zero-tolerance policy – albeit one that is consistent.

Next steps: The new system will provide a good opportunity for businesses to make improvements to their in-house systems, as penalty points will be seen as a warning to improve, rather than being met with automatic fines.  

Verdict: The slap-on-the-wrist system may be enough to change behaviour, but the element of discretion must be exercised consistently.

The new system is very clear and will proportionately affect repeat offenders

Craig McCall from Alchemy Accountancy

The new system will see a VAT-registered taxpayer receive a point if they miss a submission deadline for accounting periods beginning on or after 1 April 2022. There’s a points threshold, so if the taxpayer accrues two points a year, four points a quarter or five points a month, they become liable to a fixed penalty of £200.

It’s intended to proportionally affect those who miss deadlines regularly, rather than those who occasionally default. The penalties are very clear because they’re fixed. For example, currently, a second VAT return default in a 12-month period can trigger a 2 per cent tax charge, penalising those with a higher tax bill on that second late return.

It’s unlikely that the new system will be enough to discourage repeat offenders, though. Repeat offenders may deregister for VAT by deliberately lowering their annual taxable turnover to below £83,000 and avoid the new regime altogether.

Next steps: Stay up to date with affairs. It’s important that businesses understand the new system and the penalties that will arise at each point.

Verdict: The new fixed penalties are very clear and will only really affect those who miss deadlines regularly.

The new points system will be fairer and gives businesses enough of an incentive to get organised

Lucy Cohen, co-founder, Mazuma Money

Instead of getting an automatic fine if you miss a deadline, under the new system you’ll get a penalty point. The more deadlines you miss, the more points you get, until you reach your penalty threshold. After passing this threshold, you get a £200 fine (and another £200 fine for every subsequent deadline you miss). You can appeal points and penalties just like you can currently, but you’d need to prove a reasonable excuse.

Missing one deadline out of many in a year is hardly indicative of a dodgy character and poor record keeping – so it’s fair that those who accidentally fall foul of the deadlines don’t get penalised too heavily and are given the opportunity to correct their behaviour.

However, I’ve seen people bury their head in the sand for years with penalties and interest accruing daily, so I’m unsure if it will help change the behaviour of those who have become totally overwhelmed.

Overall, it’s a big change and quite complex to get your head around! The added complication of Making Tax Digital for sole traders means that a large group of taxpayers will also suddenly have a lot more deadlines to contend with.

Next steps: We’re advising businesses to speak to their accountants and check what systems they have in place. Double-check contact details with HMRC to make sure nothing goes amiss. Most of all – get organised!

Verdict: It will be a fairer system and gives businesses and individuals enough of an incentive to get organised.

The system may encourage smaller companies to get organised and hit deadlines

Carolyn Atkinson, director, Sheards Accountants

At first glance, the system appears to be fair, transparent and clear, especially for those businesses that have a genuine reason for missing a deadline. However, for smaller businesses that may simply overlook the date due to having responsibilities for the overall operations of their business, the fine might be enough of an incentive to encourage timely filing.

For repeat offenders who already incur fines, I can’t imagine their behaviours particularly changing. There are those who struggle with tax compliance and just accept penalties as if they are ordinary business costs. If anything, it will be those who accidentally overlook deadline dates that will be most affected by the changes.

Next steps: Businesses have been bombarded with a raft of new changes over the past few years, so clarity around what it applies to and from when will be absolutely vital, for example, only regularly filed returns will be covered by the points-based system, whereas on-off filings such as corporation tax and VAT652 will continue under the old penalties regime.

Verdict: The system could help smaller businesses who may have missed deadlines accidentally to become more organised.

Annie Makoff is a freelance journalist and editor.

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