How the penalty system for late tax submissions is changing
Released On 17th Jan 2022
Under new rules set by the Government, the system of penalties for VAT and Income Tax Self-Assessment (ITSA) are changing.
The new system of fines is aimed at tackling non-compliance by taxpayers who repeatedly fail to meet their obligations to provide returns and other information requested by HMRC. Those who make occasional and infrequent mistakes will be less likely to be penalised.
It will see the current system of automatic financial penalties removed and a new points-based system implemented, which will require taxpayers to incur a certain number of points for missed obligations before a financial penalty is issued.
The changes were initially meant to apply to VAT customers for accounting periods beginning on or after 1 April 2022, before being introduced later to 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 for all other ITSA customers from the tax year beginning 6 April 2025. However, now the new rules for VAT will be delayed until 1 January 2023.
What will be considered a late submission?
The new rules are part of the ongoing implementation of MTD, which requires taxpayers to submit tax information digitally each quarter using compliant software.
Late submission under the new rules will be a failure to provide either a quarterly MTD update or an annual return on time.
However, it will not apply to other occasional submission to HMRC, which will continue to be covered by the current penalty regime for the relevant submission.
How do the new late submission penalties work?
Every time you miss a submission deadline you will receive a point, which HMRC will notify you of on each occasion.
After you receive a certain number of points an initial financial penalty of £200 will be charged. The threshold that must be reached for a penalty to be issued is determined by how often a taxpayer is required to make their submission.
However, not only will a penalty be charged for that failure but every subsequent failure to make a submission on time. This means that those who continually fail to meet their obligations could face big fines.
The penalty thresholds are as follows:
Submission frequency Penalty threshold
Annual 2 points
Quarterly (including MTD for ITSA) 4 points
Monthly 5 points
The points are only applied to each type of submission you need to make, as you will only have points totals for each obligation.
That means if you miss two deadlines for separate submissions in the same month, you will be penalised separately for each submission type.
It is only where you regularly miss consecutive deadlines for a single type of submission that you will begin to accrue points that lead to a fine.
In general, if a taxpayer makes two or more failures relating to the same submission obligation in the same month, they will only incur a single point for that month.
This is to prevent a taxpayer reaching the points threshold too rapidly to be able to improve their compliance. However, there are exceptions to this rule, which can be found here.
