The government are reforming sanctions for late submission and late payment. The changes will initially apply to VAT and Income Tax Self-Assessment (ITSA). The late submission penalties will apply to those who fail to meet their obligations to provide returns and other information requested by HMRC on time. However, you will no longer receive an immediate financial penalty for filing to meet a submission obligation. Instead, you will incur a certain number of points for missed obligations before a financial penalty is levied.
The government have explained that this new, point-based regime is designed to be proportionate, meaning that only the small minority who persistently miss their submission obligations will be penalised, not those who make occasional mistakes.
The reforms will come into effect:
- for VAT taxpayers from periods starting on or after 1 April 2022
- for taxpayers in Income Tax Self-Assessment (ITSA), from accounting periods beginning on or after 6 April 2023 for taxpayers with business or property income over £10,000 per year (that is, taxpayers who are required to submit digital quarterly updates through Making Tax Digital for ITSA)
- for all other ITSA taxpayers, from accounting periods beginning on or after 6 April 2024
How will the new Late Submission Penalties work?
You (the taxpayer) will receive a point every time that you miss a submission deadline and HMRC will notify you of each point. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The lenience threshold of how many points you can accumulate is determined by how often you are required to make your submissions.
When a taxpayer has reached the relevant threshold, as determined by their submission frequency, a penalty will be charged for that failure and every subsequent failure to make a submission on time, but their points total will not increase.
The penalty thresholds will be as follows:
|Submission frequency||Penalty threshold|
|Quarterly (including MTD for ITSA)||4 points|
What if I have multiple submission obligations?
You will have a separate point total for each submission obligation which you may have. For example, if you are required to provide an annual ITSA return and quarterly VAT returns, you will have separate points totals for ITSA and VAT.
If both returns are late, a point will be applied to the points total to which the return relates. This also means that if you submitted VAT on time but your ITSA was late, you will only receive a point for the ITSA late submission.
How quickly can I accumulate points?
As a general idea, you can only receive one single point for two or more failures relating to the same submission obligation in the same month. HMRC have done this in an attempt to stop you accidentally reaching the points threshold too quickly.
However, as always, there are exceptions to this rule – although you can only accumulate one point per month for the same submission obligation in the same month, this does not apply across different MTD for ITSA submission obligations. This means that if you are an ITSA taxpayer who has a quarterly regular update deadline, an EOPS (End of Period Statement) deadline and a Final Declaration deadline in the same month, you can accrue three points if you were to miss all three deadlines.
Additionally, if you have MTD for ITSA submission obligations for two or more businesses (and are therefore required to submit separate regular updates and EOPS for each business), you will have one points total for all those submissions for different businesses. If you were to submit one or more of each of the different types of submissions late, you will only accrue a maximum of one point. For the purposes of this rule, tax year quarters will be used (rather than business accounting period quarters, which differ from business to business).
For example, if you have three businesses and fail to meet an ITSA regular update deadline falling in quarter 1 for either one, two or three of their businesses, you will accrue one point. If you also fail to meet the EOPS deadline for either one, two or three of your businesses, you will accrue an additional point. Finally, if you fail to provide your Final Declaration by the deadline, you then will accrue an additional point.
If I accrue points, how long will I have them for?
Points which you gain will have a lifetime of two years; after which they will expire. This will be calculated from the month after the month in which the failure occurred. For example, if you missed a deadline in May, your two-year countdown would begin in June. If you were to reach the penalty threshold, your points will not automatically expire. This means that you must achieve a period of compliance to reset your points:
After you have reached the penalty threshold, all the points accrued within that points total will be reset to zero when you meet the following conditions:
- A period of compliance (that is, meeting all submission obligations on time for the period of compliance); and
- You have submitted all the submissions which were due within the preceding 24 months. It does not matter whether or not these submissions were initially late.
Both requirements must be met before points can be reset.
The periods of compliance are:
|Submission frequency||Period of compliance|
|Quarterly (including MTD for ITSA)||12 months|
Please note that if you are at the penalty threshold and have achieved the period of compliance, but have not submitted outstanding submissions, you will remain at the penalty threshold and continue to be charged penalties for any further failures to make submissions on time.
There will be time limits after which a point cannot be levied.
The time limits for levying a point depend on the taxpayer’s submission frequency and start from the day on which the failure occurred, as follows:
|Submission frequency||Time limit for levying a point|
|Quarterly (including Making Tax Digital)||11 weeks|
The time limit for HMRC to assess a financial penalty will be two years after the failure which gave rise to the penalty.
Where a Tribunal decision results in the cancellation of a point or a financial penalty, HMRC will have 12 months from the date of the Tribunal decision to levy a point or financial penalty that would have accrued for failures that occurred but were not added to the points total because the taxpayer was at the penalty threshold.
Where HMRC discovers that a customer had previous submission obligations which HMRC was unaware of at the time, HMRC will also have 12 months from the date of the discovery to levy points and financial penalties.
Can I appeal if I receive a point?
Yes, if you believe that a point which you have received is unjust, you will be able to challenge a point or penalty through both an internal HMRC review process and an appeal to the courts (the First Tier Tax Tribunal). The grounds for an appeal will include the grounds that the taxpayer had a reasonable excuse for missing a filing deadline.
This is an interesting change to late submission penalty system but hopefully a good one for those taxpayers who are consistent with their filing and make only the occasional mistake. If you would like to learn more, you can find additional information here.
If you have any questions about the content in this article please contact your usual Partner or Manager, or call us on 01942 242 245, and we will be happy to help.