The new penalty regime from HM Revenue & Customs

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The new penalty regime from HM Revenue & Customs (HMRC)

The UK tax system is moving towards a more digital system with the introduction of Making Tax Digital (MTD) and as part of it HMRC are introducing new penalty measures.  If you are not familiar with MTD then please visit our previous blogs What is MTD, digital-record-keeping and digital-links

HMRC says the new measures will make the sanctions on late filing and late payment of taxes simple, fair, and effective by incentivising compliance so more carrot rather than stick.  It will penalise those who persistently do not comply whilst being more lenient on the occasional slip up.

Also, the current penalty regimes for late submission and late payment and interest are inconsistent across major taxes, meaning HMRC penalises the same behaviour in different ways.  The new system aims to bring consistency eventually across our entire tax system.

Who will be affected by the new HMRC penalty system?

For now the reform introduces a common approach across VAT and Income Tax / Self-Assessment (ITSA), making it easier for taxpayers to comply with their submission and payment obligations and making late payment penalties more proportionate to the lateness of payment.

If your business turnover is over £85K then your VAT compliance is already under MTD and those that are voluntarily registered for VAT will be brought under MTD from April 2022.  ITSA taxpayers will be brought under MTD starting from April 2023.  Therefore, the introduction of the new “interest harmonisation and penalties” will follow these deadlines.

In summary Penalty Reform will replace existing penalties and will come into effect as follows:

  • VAT taxpayers for accounting periods beginning on or after 1 April 2022
  • ITSA taxpayers with business or property income over £10,000 per year (who are required to submit digital quarterly updates through Making Tax Digital for ITSA) for accounting periods beginning on or after 6 April 2023, and to all other ITSA taxpayers for accounting periods beginning on or after 6 April 2024

So, if you submit VAT Returns and or a Self-Assessment Tax Return then you will be affected by the new penalty regime.

What is the new penalty regime with HMRC?

The system to be introduced is a points-based system and the more points you accumulate the higher the penalty. Legislation will align the interest rules for VAT to ensure they follow similar rules to those for ITSA. Currently different rules apply to both taxes.

It works a bit like the penalty points on your driving licence when you are convicted of a motoring offence.  Once you receive the points, they stay on your tax records for 24 months.

Each taxpayer is allowed a points threshold after which a financial penalty is imposed.  Each time you miss a deadline you will incur one point, but the threshold varies depending on the type of tax and therefore the frequency of filing.

How will the new HMRC penalty system work?

When a taxpayer misses a submission deadline, they will incur a point. Points accrue separately for VAT and for ITSA.  There are separate penalties for both filing and payments.

  1. Penalty for late filing

A taxpayer becomes liable to a fixed financial penalty of £200 only after they have reached the points threshold.

The level of points threshold depends on the taxpayer’s submission frequency:

Annually = 2 points

Quarterly = 4 Points

Monthly = 5 Points.

Individual penalty points accrued will automatically expire after 24 months provided the taxpayer remains below the points threshold.

If the taxpayer continues to miss submission deadlines after they have reached the points threshold and have been issued with a penalty, they will become liable for a further fixed rate penalty for each additional missed obligation. This is the case even if they have paid the fixed rate penalty.

Legislation will be introduced in Finance Bill 2021 which has now had Royal Assent.

  1. Penalty for late payments

The new late payment penalty will consist of two separate charges. The first charge will become payable 30 days after the payment due date and will be based on a set percentage of the balance outstanding.

First charge

  • 0-15 days late No penalty
  • 16 -30 days late 2% interest charge on the tax outstanding
  • 30 days and over 4% interest charge on the tax outstanding

So, there is no penalty if you pay your tax within 15 days of the due date.  The penalty will also not apply if you approach HMRC and agree a Time to Pay (TPP).


Second charge


A second charge will also become payable from Day 31 and will accrue on a daily basis, based on the amounts outstanding unless you agree a TPP.  The rate of interest will be 4%.

What should I do to avoid future penalties?

If you have incurred penalties, then you will be notified of both the first and the second charge and if you are not in agreement you have a right to appeal within 30 days.

In common with other tax penalties, a taxpayer will not incur a late payment penalty if they had a reasonable excuse for not making the payment or filing on time and will have a right to appeal against the penalties.

If you are unable to make payments on time, then your best option is to contact HMRC and arrange for TTP which is also your current best option. Both the first charge and the second charge can be reduced or stopped if HMRC agrees TTP so it is always best to speak to them.  They will discuss your affordability and will ask you for an outline of a plan.  Just be mindful that overall HMRC will let you pay the tax back in instalments within a year.

Finally, if you are struggling to pay your tax bill due to Coronavirus you should speak to HMRC to come to an arrangement via TPP.

HMRC coronavirus helpline
Telephone: 0800 0159 559
Monday to Friday, 8am to 4pm

Calls to this number are free.

You can also access more information here