In their infinite wisdom, HM Revenue and Customs (HMRC) have created a new combined regime to replace the existing penalty schemes under Making Tax Digital (MTD) for VAT as well as MTD for Income Tax Self-Assessment (ITSA). To be fair, HMRC is at least giving itself enough time to cross all of the ‘i’s and dot all of the ‘t’s, as the earliest that the new rules will apply is April 2022.
How will it work? Well, it’s not as simple as it might first appear. The new scheme will be both points based and calculated on percentages across both late submissions and late payments, but there are differences between the two.
The new scheme will be rolled out in stages, to ease us in gently. The dates are as follows:
- For VAT taxpayers, from their first VAT return period starting on or after 1 April 2022.
- For ITSA taxpayers, from their first accounting period (or tax year) starting on or after 6 April 2023.
- For non-MTD Self-Assessment taxpayers, from their accounting period (or tax year) starting on or after 6 April 2024.
The new scheme will be points based and for every late submission you make, you will incur 1 point. There is a maximum threshold for points which is dependent on how often you submit a return, e.g., annual = 2 points, quarterly = 4 points and monthly = 5 points. As long as you stay beneath the threshold, points will automatically expire, or ‘drop off’ (rather like a driving licence – indeed, HMRC could well have taken inspiration from the DVLA) after a period of 24 months.
If you’re still with us, well done for getting this far! Now, if you exceed the threshold, the points will remain until you have complied for a period of time, as follows:
- Annual – 24 month
- Quarterly – 12 months
- Monthly – 6 months
Here’s the good part (at least, for HMRC anyway) – once you hit the points threshold, you will also incur a penalty of £200, not just once, but EVERY time you miss a deadline, until you manage to complete a period of compliance, as set out above.
Late Payment Penalties
Late payment penalties will not be points-based, but rather more proportionate to the length of time that payment is outstanding. The defaulting taxpayer could also receive TWO penalties, depending on when payment is made.
The first penalty will be levied 31 days after the due date and is a fixed percentage, which would be calculated depending on the amount outstanding on days 15 and 30.
The second penalty will be calculated on amounts outstanding from day 31 until the principal balance is paid in full – this is calculated DAILY until the outstanding amount is paid.
For example –
- 0-15 days late No penalty
- 16-30 days late 2% of outstanding amount
- Day 30 4% of outstanding amount
HMRC will notify the taxpayer separately of both penalties and it is also worth noting that if ‘Time to Pay Arrangements’ have been negotiated with HMRC, then late payment penalties will not accrue. Also, for the first 12 months of the scheme, if payment is made within 30 days of the due date, no penalty will be imposed.
Basically, the best way to approach this is to not submit late returns and to make your payments on time. However, if late submissions or payments are unavoidable, you will need to monitor your accrual of points across both late submissions and late penalties to avoid getting caught out, as they’re not the same across both VAT and self-assessment.
HMRC say that they were aiming to simplify the system to make it ‘easier’ for people to understand, but at the moment, only time will tell as to whether this is a penalty too far for the good taxpayers of England.
If you would rather let us take the strain of worrying about getting your returns in on time to avoid the whole penalty regime headache, give Amanda a call or drop her an email.