The government is changing the sanctions for late tax submissions and payments, starting with VAT in January 2023, followed by Income Tax Self Assessment (ITSA) in April 2024. 

The new late payment and submission penalties will apply to taxpayers who fail to pay tax or file returns on time. The new regime will penalise the small minority who persistently miss filing and payment deadlines and will be more lenient to those who slip up occasionally. 

The reforms introduce a common approach across ITSA and VAT, making the system fairer and more consistent.

The regime is designed for taxes with regular submission obligations. It will apply first to VAT customers for accounting periods beginning on or after 1 January 2023.

Initially, the intended start date was April this year, but earlier this month (January 2022), HMRC announced that the VAT changes would be delayed by nine months to 1 January 2023. HMRC says the extra time allows it “to ensure the IT changes necessary for the new penalties and interest charges can be introduced as effectively as possible”. In the meantime, the existing default surcharge rules will continue to apply.

The timetable for the introduction of the new regime will remain as previously announced by the government and will be as follows:

  • ITSA customers with business or property income over £10,000 per year (who are mandated for Making Tax Digital (MTD) for ITSA) from the tax year beginning 6 April 2024, and 
  • all other ITSA customers from the tax year beginning 6 April 2025.

Late payments 

HMRC will charge late payment penalties as follows (unless the taxpayer has a reasonable excuse):

No. of days late                                        Penalty
Up to 15 days No penalty
16 to 30 2% of the outstanding balance at day 15
More than 30 2% of the outstanding balance at day 15 plus 2% of the outstanding balance at day 30 plus a penalty of 4% p.a on the unpaid balance from day 31

The taxpayer can avoid further penalties by agreeing a ‘time to pay’ arrangement with HMRC. For example, a business will not face a penalty if it approaches HMRC up to 12 days late. 

Under the current system, the penalty is dependent on previous defaults. From 1 January 2023, the system will be fairer as the new penalties will apply separately to each late payment. As businesses will have a 15-day grace period, they will no longer incur a substantial surcharge for being only a day or so late.

Interest on late VAT will be charged from the date payment was due until it is received. 

Late submissions
Instead of taxpayers receiving automatic financial penalties for late filing, they will incur a certain number of points before a financial penalty is levied. 

Taxpayers will receive a point each time they miss a submission deadline. On reaching certain thresholds, a penalty of £200 will be charged. Once the threshold has been reached, a penalty will be charged for each subsequent failure, but the points total won’t rise. 

The penalty threshold will be:

Submission frequency Penalty threshold
Annual 2 points
Quarterly (including MTD for ITSA) 4 points
Monthly 5 points

Taxpayers will have a points total for each submission obligation. So, for example, if they are required to provide an annual ITSA return and quarterly VAT return, they will have a separate point total for each. 

Points will have a lifetime of two years, after which they will expire unless the points threshold has been reached.

Once a points threshold has been reached, a taxpayer’s points will only be reduced to zero if they are on time with returns throughout a set compliance period (for example, if they submit quarterly returns, they need to file on time over a period of 12 months).

Please contact us if you have any queries regarding the new penalties coming into effect on 1 January 2023.

Warning: The above is merely general guidance and should not be relied upon as formal advice. The advice we give to each client will depend on their specific circumstances. We suggest you take professional advice before taking any action in relation to the issues discussed above.