Getting ready for HMRC’s new penalty regime

Paying your tax bill on time can be a struggle. The HM Revenue & Customs’ (HMRC’s) penalty regime exists, to act as a deterrent for late payment and overdue submissions.

But did you know that HMRC is planning to update and change its penalty regime?

HMRC currently has different penalty regimes for late submission of tax forms and payments, depending on the particular tax. A new penalty regime is on the way, though, with the aim of rationalising the system for VAT and income tax.

The aim will be to make the regime more consistent and better targeted at persistent offenders. But how is this change to the penalties system likely to impact on you and your business?

How does the new penalty regime work?

The new penalty regime comes into effect from 1 April 2022 for VAT, 6 April 2023 for MTD Income Tax taxpayers and all other Income Tax Self-Assessment taxpayers from 6 April 2023.

For late submissions, a points-based system will apply, with each late submission attracting a penalty point. When a cumulative number of points are given, a fixed £200 penalty will be levied – meaning an instant penalty for your business if you accrue the required tally of penalty points.

The thresholds are:

  • Annual returns: 2 points
  • Quarterly returns: 4 points
  • Monthly returns: 5 points

All points expire 24 months after being given, provided that no penalties were triggered. If penalties were triggered, then they expire after a set period of compliance:

  • Annually: 24 months
  • Quarterly: 12 months
  • Monthly: 6 months

Preparing for the change to HMRC penalties

A good understanding of the new points-based system will help you to avoid any hefty penalty fines. But this means familiarising yourself with the new rules and making sure that you submit your returns and tax payments in a timely manner.

Other points to note include:

  • VAT and Income Tax points will be treated separately.
  • There will also be two late-payment penalties where any tax is overdue and no ‘time to pay’ (TTP) arrangement has been entered into.
  • The first penalty will be 2% of the tax due where it’s either paid or a TTP arrangement is agreed between 16 and 30 days after the due date. If payment isn’t made and no TTP agreement is made by the 30th day, the penalty is 4% of the tax due.
  • The second penalty accrues daily at a rate of 4% per annum on any tax unpaid after day 30 where no TTP is in place, and continues until the tax is paid or a TTP is agreed.

Keeping a schedule of returns

Even with the best intentions, circumstances can sometimes occur which prevent you from making your submissions to HMRC on time. In these mitigating circumstances, penalties can be appealed against. You should, however, maintain a schedule of all returns due.

If you anticipate having difficulty paying tax as it becomes due, you should attempt to make a TTP arrangement as soon as you know the amount payable.

Working with you to keep submission on time

Where we’re responsible for submission of your returns, we’ll be carefully monitoring all due dates to ensure that you don’t miss the deadlines – and, subsequently, avoid any penalty points.

If you’re unsure of your ability to pay the more unpredictable taxes, such as VAT, corporation tax and personal tax, talk to us about preparing a forecast to avoid any surprises.