Government confirms new penalty and interest regime

Government confirms new penalty and interest regime

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Reforms to the penalty and interest regimes for VAT and income tax self assessment have been confirmed by the government. The measures will bring significant changes and will first apply to VAT returns from April 2022, before being extended to self assessment returns.

The reforms are part of the Chancellor Rishi Sunak’s Budget package, although he did not mention them in his Budget day speech.

The new penalties for late submission of tax returns and late payment of tax will also see the harmonisation of interest rules across different taxes. The government estimates that the measures will raise £155m a year by 2024/25.

The start dates for the new penalty regime are as follows:

  • VAT – periods starting on or after 1 April 2022.
  • MTD self assessment – accounting periods beginning on or after 6 April 2023.
  • Other self assessment taxpayers – accounting periods beginning on or after 6 April 2024.

Taxpayers will not be charged an automatic financial penalty if they fail to meet a submission obligation. Instead, they will incur a penalty point for each missed submission obligation and a financial penalty will only be levied once the taxpayer reaches a penalty points threshold. The threshold varies depending on frequency of the obligation (monthly, quarterly, annually) and the penalty has been set at £200.

The points system will be applied separately to each tax and it will be possible to appeal against penalty points as they are incurred. The points will expire after a period of full compliance of up to 24 months.

Late-payment penalties come into effect for:

  • VAT – periods starting on or after 1 April 2022.
  • MTD ITSA – accounting periods beginning on or after 6 April 2023.
  • Other ITSA taxpayers – accounting periods beginning on or after 6 April 2024.

Two late-payment penalties may apply. A first penalty of 2% of the unpaid tax is charged on tax unpaid 15 days after the due date, increasing to 4% if the tax remains unpaid 30 days from the due date.

An additional penalty at an annualised penalty rate of 4% will accrue on a daily basis on tax remaining unpaid after 30 days.

The penalties will not be levied if the taxpayer has contacted HMRC to arrange time to pay by the trigger date for the penalty, so long as the taxpayer ultimately agrees the time-to-pay arrangement.

HMRC has confirmed it will take a ‘light-touch approach’ in its first 12 months of operation for both VAT and income tax. A spokesman said: “Where a customer makes reasonable efforts to get in touch with HMRC, we will not charge late-payment penalties on tax paid up to 30 days late in the first year.”

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