New Penalty Regime - Overview

The new penalty regime replaces instant late filing penalties and aligns the VAT and income tax penalty regimes. The legislation allows HMRC to issue penalty points if returns are submitted late. Depending on the type of return, a taxpayer can gather more points before being issued with a financial penalty.

The legislation is designed to target those who have an ongoing issue with filing returns on time, rather than those who are late as a ‘one-off’. The new penalty regime “will apply to VAT customers for accounting periods beginning on or after 1 April 2022, 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.”[1]

The time limits and penalty points awarded are dependent on the type of returns being delivered to HMRC. These are split into three groups – Annual, quarterly and monthly returns and for ease, we will deal with each of these separately. Note that this is a broad analysis so (e.g.) the dates for expiry or issue of points may vary by a few days depending on the specifics of each situation.

All legislation references are to Sch 24, Finance Act 2021 unless stated otherwise.

Annual returns

Where there is a failure to make a return, HMRC can award a penalty point. When they do so, they must notify the taxpayer within certain time limits – the later of

- 48 weeks from the due date

- 12 months from the date the liability is determined (i.e. when the return is filed) or from the end of the appeal period if HMRC raise an assessment; or

- 12 months from the date HMRC could be reasonably expected to be aware that the person was required to make a return.

Where there are annual returns, a taxpayer can reach a maximum of 2 points. (i.e. 2 defaults) before being issued with a penalty. The points will expire 24 months after they were issued unless at that date, the taxpayer has already accrued 2 points.

Each of the penalty points will expire if the taxpayer has submitted all their returns on time for a period of 24 months and HMRC must notify the person if and when the points expire. There is no time constraint on this notification, though we would hope HMRC notify taxpayers promptly.

Quarterly returns

Where HMRC awards a penalty point in respect of quarterly returns, it must notify the taxpayer by the later of

- 11 weeks from the due date of the return;

- 12 months from the date the liability is determined (i.e. when the return is filed) or 12 months from the end of the appeal period if HMRC raise an assessment; or

- 12 months from the date HMRC could be reasonably expected to be aware that the person was required to make a return.

A taxpayer can reach a maximum of 4 points before being issued with a penalty. The points will expire 24 months after they were issued unless at that date, the taxpayer has already accrued 4 points.

Each of the penalty points will expire if the taxpayer has submitted all their returns on time for a period of 12 months and if the person has submitted all returns due within the last 24 months, regardless of whether those returns were submitted on time. HMRC must notify the person if and when the points expire.

Monthly returns

Where HMRC awards a penalty in respect of quarterly returns, it must notify the taxpayer by the later of

- 2 weeks from the due date of the return;

- 12 months from the date the liability is determined (i.e. when the return is filed) or 12 months from the end of the appeal period if HMRC raise an assessment; or

- 12 months from the date HMRC could be reasonably expected to be aware that the person was required to make a return.

A taxpayer can reach a maximum of five points before being issued with a penalty. The points will expire 24 months after they were issued unless at that date, the taxpayer has already accrued five points.

Each of the penalty points will expire if the taxpayer has submitted all their returns on time for a period of 6 months and if the person has submitted all returns due within the last 24 months, regardless of whether those returns were submitted on time i.e. if the taxpayer has brought their affairs up to date, the points will expire and again HMRC must notify the person if and when the points expire.

Penalties

If a person fails to make a return on time, then they will be liable for a penalty if :

  • failure to make a return results in a further penalty point; and
  • on receipt of that penalty point, the person has accrued the maximum number of permitted points.

 

The person will then be liable to an automatic penalty of £200.

Any further failures to file on time will result in automatic penalties of £200 until such time as the penalties expire.

HMRC have time limits within which they must issue any penalty notices (paragraph 17). These are the later of

  • two years from when the failure occurred (or if a group of failures then two years from when the latest failure occurred);
  • 12 months from the end of the appeal period for the assessment of the liability or the date the liability is otherwise determined (e.g. filing the return).
  • or 12 months from the date HMRC became aware the person should have filed a return.

 

Additional points to note

  • a person cannot be liable to more than one penalty point per month for each of the following groups of returns:
  • Annual income tax, capital gains tax or corporation tax returns;
  • VAT returns (annual, quarterly or monthly)
  • unless there are assessments and appeals, HMRC are required to notify the taxpayer within a few weeks/months if a penalty point has been levied. In this way, the taxpayer should be aware of the penalty point position before submission of the next return.
  • the penalties are not levied automatically, “HMRC may award” (paragraph 6) a penalty point where there is a failure to file. Accordingly, if there is no notification by HMRC within the relevant time limits, the taxpayer will assume no points have been accrued. The legislation states that “Where HMRC award a penalty point they must notify the person and state in the notice…[the reason for the points being awarded]”, the implication being there must be some correspondence from HMRC to the taxpayer. We understand that ultimately, HMRC intends to have the points showing on the online taxpayer portals. Accountants should keep an eye out on the portals where returns are filed late, in case penalty points appear without corresponding explanation. In case there is a delay to updating the online portal for this, advisers may need to keep a manual record in the meantime.
  • The usual protections are available - taxpayers can appeal any penalty points in the same way they would appeal assessments, including by way of independent review or appeal to Tribunal (paragraphs 22-24);
  • If a failure to file on time results in a taxpayer reaching the maximum number of penalty points and becoming liable to a financial penalty, HMRC must issue the penalty point before or at the same time as the penalty notice. CIOT commentary on the legislation says that “if the penalty is [issued] before [the penalty points notice], it will invalidate the penalty notice”. Strictly speaking, the legislation does not state that the penalty assessment will be invalid (though it is implied) and there is nothing to say HMRC cannot simply reissue the penalty assessment. It will be interesting to see how this plays out in practice.
  • Finally, where a person moves from one group of returns to another (e.g. from filing annually to filing quarterly due to MTD), there are provisions for how penalty points should be recalculated.

 

Overall, the legislation is prescriptive and encourages compliance while penalising ongoing non-compliance. The alignment of the VAT and income tax penalties will make things easier to understand for clients and with MTD, this makes more sense as all taxes are heading towards the same platform.

Accountants be warned, penalty points stay on the system so even though your client may not receive a financial penalty, it is worth appealing the penalty point if you consider there is a reasonable excuse for the late submission. In the short term, the lack of penalty may mean that the penalty points are ignored but this could result in higher costs later on, which could have been avoided.


Mala Kapacee is a Chartered Tax Adviser and Director of London Tax Network Ltd, a Tax Investigations Specialist consultancy. Her experience includes resolving tax enquiries, CoP8 and 9 Investigations as well as disclosures for a range of taxes and situations; self-employment, property, owner managed businesses and non-UK domiciled individuals. Mala lectures regularly for professional bodies including the CIOT and the CIMA. She founded the London Tax Society in 2017 and actively encourages networking and technical development for Young Professionals. She was a finalist for Best Rising Star in Tolley’s Taxation Awards 2020. Email mala@londontaxnetwork.co.uk or call 07783 236 845.

 

[1]     https://www.gov.uk/government/publications/penalties-for-late-submission/penalties-for-late-submission

Mala Kapacee

Written by Mala Kapacee

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