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The new HMRC penalty points system

HMRC letter expalined

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HMRC’s new points-based penalty regime for late submissions and payments will start to come into effect from 1 April 2022.

The changes will apply first to the submission of VAT returns for VAT return periods beginning on or after 1 April 2022.

The penalty regime will then be extended to Making Tax Digital (MTD) Income Tax Self Assessment (ITSA) accounting periods beginning on or after 6 April 2023. This will be in tandem with the extension of MTD (from the same date) for taxpayers with business or property income over £10,000 annually.

The new penalty scheme will then be extended to all other ITSA taxpayers for accounting periods beginning on or after 6 April 2024.

Under the new regime, taxpayers will incur a penalty point for each missed submission deadline. This represents a step change from the current system where financial penalties are usually automatically issued when a taxpayer fails to meet a stated filing or payment date.

At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The threshold varies depending on the required submission frequency.

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HMRC has stated that the penalty thresholds will be as follows:

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

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. The penalty points will apply separately to VAT and ITSA submissions, so for example a point for late VAT submission would not be added to a point for a late ITSA submission.

The penalty points will have a lifetime of 2 years calculated from the month after the month in which the failure occurred. However, once the penalty threshold has been met, the points will only reset to zero following a period of compliance by the taxpayer and when all outstanding submission from the previous 2 years have been submitted.

The periods of compliance are:

Submission frequency Period of compliance
Annual 24 months
Quarterly (including MTD for ITSA) 12 months
Monthly 6 months

There are also time limits after which a point cannot be levied.

In addition, the new system will see the introduction of two new late payment penalties.  A first penalty of 2% of the unpaid tax that remains outstanding 15 days after the due date. The penalty increases to 4% of any tax still outstanding after 30 days. An additional or second penalty at a penalty rate of 4% per annum will accrue on a daily basis after 30 days. This additional penalty will stop accruing when the taxpayer pays the tax that is due.

There will be an appeals mechanism for both the late submission and late payment penalties available through an internal HMRC review process and an appeal to the First Tier Tax Tribunal.

HMRC has also confirmed that it will operate a light-touch approach in the first 12 months of operation of the new regime for both VAT and ITSA. This is likely to see HMRC refrain from charging late payment penalties on tax paid up to 30 days late in the first year.

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