Under new rules set by the Government, the system of penalties for VAT and Income Tax Self-Assessment (ITSA) are changing.

The changes are aimed at tackling non-compliance among taxpayers who repeatedly fail to meet their obligation to provide returns and other information requested by HMRC.

In the interest of ‘fairness’, those who make occasional and infrequent mistakes (that are more likely to be accidental oversights) will be less likely to be penalised.

The system currently in operation, of automatic financial penalties, will be removed and a new points-based system introduced in its place. This will require taxpayers to incur a certain number of points for missed obligations, before a financial penalty is issued.

The changes were due to take effect for VAT customers, for accounting periods beginning on or after 1 April 2022, but this has now been deferred for 9 months, to 1 January 2023.

Following on from this, it is still expected that the system will be introduced for ITSA customers with business or property income over £10,000 per annum, who are mandated for Making Tax Digital for ITSA, from the tax year beginning 6 April 2024, and for all other ITSA customers from 6 April 2025.

What is classified as a late submission?

The new rules are part of the ongoing rollout of MTD, which requires taxpayers to submit tax information digitally, each quarter, using compliant software.

Late submission as far as the new rules are concerned, will be a failure to provide either a quarterly MTD update or an annual return on time.

Important to note, is that this does not apply to other occasional submissions to HMRC, which will continue to be covered by the current penalty regime for the relevant submission.

VAT & ITSA: how do the new late submission penalties work?

Effectively, each time you miss a submission deadline you will receive one point (and each type of submission carries its own points total), which HMRC will notify you of on each occasion.

Once a certain threshold is reached, an initial financial penalty of £200 will be charged; the threshold will be determined by the intervals at which submissions are required.

Penalties will then be charged for every subsequent failure to make a submission on time, meaning persistent non-compliance could leave taxpayers facing big fines.

Are late submission penalty points retained over time?

Points have a lifetime of two years, after which they will expire, unless the taxpayer has already reached a threshold. The two-year period starts the month after the month in which the failure occurred.

After a taxpayer has reached the penalty threshold, all the points accrued within that points total will be reset to zero when the following conditions are met:

  • A period of compliance; and
  • All submissions due within the preceding 24 months have been provided.

If a taxpayer is at the penalty threshold and has achieved the appropriate period of compliance, but has not submitted outstanding submissions, they will remain at the penalty threshold and continue to incur penalties for any further failures.

However, there will be time limits after which a point cannot be levied, commencing on the day the failure occurred. The time limit for HMRC to assess a financial penalty will be two years after the failure which gave rise to the penalty.

View our infographic

Can I appeal penalty points?

You can challenge a point or penalty issued by HMRC, via its internal review process or an appeal to the First Tier Tax Tribunal. It is expected that, if appealing, you will be able to prove you had a reasonable excuse for the failure – for example, illness or bereavement.

Here to help

This article seeks to cover the ‘basics’ when it comes to these impending changes, and there are additional rules outside the scope of this guidance that may affect how penalty points are issued to you or your business.

If you are concerned about these changes or you would like advice on remaining compliant with MTD for VAT and ITSA, please get in touch with our team today.

Link: Penalties for late submission

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