New HMRC filing regimes, where points mean penalties

16 Jun 2022

By Alix Hyde, VAT Consultant

HMRC have announced that they will be introducing two new penalty regimes to encourage taxpayers to both file their returns and to pay their tax liability at the right time.  For VAT customers the regimes will apply to businesses with VAT periods beginning on or after 01 January 2023. 

For ITSA customers with business or property income over £10k the regimes will apply from the tax year beginning 06 April 2024.  This will be in line with the introduction of Making Tax Digital ITSA real time information (RTI) reporting, which was due to start in April 2023, but which has been delayed by a year due to the Covid-19 pandemic.  It will apply to all other ITSA customers from the tax year beginning 06 April 2025.

Late Submission Penalties

These new penalties will affect those who fail to submit returns or requested information on time.

Instead of an automatic financial penalty, taxpayers will receive a point each time an obligation is missed.  Once they hit a set number of points (based upon the frequency of their submissions (2 points for annual returns, 4 points for quarterly returns and 5 points for monthly returns), they will receive a fine of £200.  For each subsequent late return, they will incur a further £200 fine.  Their points total will not increase. 

There will be separate points for each obligation, i.e., VAT and ITSA will amass different points.

The regime is designed to be kinder to people who make a one-off mistake, but to deter persistent offenders.

Generally, points will have a lifetime of two years, after which they will expire, and the taxpayers will return to zero points.  However, points will not expire if the taxpayer is at the penalty threshold.  In this situation they must achieve a period of compliance in order to reset their points to zero. 

The conditions of this period of compliance are:

  • All returns are submitted on time for a period based upon their return submission frequency (24 months for annual returns, 12 months for quarterly returns and 6 months for monthly returns), and

  • All returns for the preceding twenty-four months must be submitted (even if late).

Both conditions must be met for the points to be reset.

The regime only applies to taxpayers who have a regular submission obligation.  It does not apply to one-off submissions.  These will continue to be covered under the old regime.

Late Payment Penalties

This penalty will replace the default surcharge VAT regime.

There are two penalties which may occur.

First Penalty

The taxpayers will not receive a penalty if payment is made within the first 15 days after the due date.  This is more time than currently allowed, following the submission of a VAT return.

On day 15, the first penalty kicks in.  This is 2% of the amount outstanding.

If there is any amount still unpaid at day 30, the penalty is calculated as 2% of the amount outstanding at day 15 PLUS 2% of the amount outstanding at day 30.  In most cases this will be 4% of the amount owed at day 30.

Additional or Second Penalty

If tax remains unpaid on day 31, an additional penalty will be incurred.  This will accrue daily at the rate of 4% per annum on the outstanding amount.  The penalty will only stop accruing when the outstanding balance is paid.

Soft Landing Period

There will be a twelve-month soft-landing period.  This means that HMRC will not charge a first late payment penalty for the first year from 01 January 2023 until 31 December 2023, if the outstanding amount is paid in full within 30 days of the normal payment due date.

Time to Pay Arrangements

When a time to pay arrangement is agreed with HMRC, the penalty will stop accruing.  The penalty will only remain paused if the taxpayer continues to honour the terms of the TTP agreement.

Penalty Not Charged by HMRC

If HMRC agrees that the taxpayer has a reasonable excuse for the late payment of returns, they will not charge a penalty.

Additionally, they will take a light touch approach to the late payment penalties in the first year of operation, as HMRC understands that this will be a significant change for some customers.

Here to help

If you have any VAT related questions or queries please contact Alix Hyde –

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