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The Finance Act 2021 reforms the penalty regime for VAT and income tax self-assessment to make it fairer and more consistent
The new late submission regime will be points-based, and a financial penalty will only be issued when the relevant threshold is reached.
The new regime will apply to:
- VAT businesses for accounting periods beginning on or after 1 April 2022
- income tax self-assessment (ITSA) individuals with business or property income over £10,000 per year (who are required to submit digital quarterly updates through Making Tax Digital (MTD) for ITSA) for accounting periods beginning on or after 6 April 2023
- all other ITSA taxpayers for accounting periods beginning on or after 6 April 2024.
The changes will apply only to those taxpayers with regular submission obligations and not for a submission required for a one-off transaction (which will continue to be covered by the current penalty regime for the relevant submission).
How the penalty points will work
Under the new system, penalties will be points-based rather than automatic. Instead of getting an automatic fine, the taxpayer will get a penalty point. If a certain threshold of points is reached, a financial penalty of £200 will be charged. The threshold is determined by how often a taxpayer is required to make their submission.
The table below shows the penalty points threshold:
|Submission frequency||Penalty threshold|
|Quarterly (including MTD for ITSA)||4 points|
Taxpayers will have separate points totals for each submission obligation they have. For example, if a taxpayer is required to provide an annual ITSA return and quarterly VAT returns, they will have separate points totals for ITSA and VAT. If both returns are late, a point will be applied to the points total to which the return relates: one for annual submission, and one for quarterly VAT returns.
If both returns have an annual submission frequency, there would still be two separate points totals, one for ITSA and one for VAT, and the taxpayer would incur a single point for each if both returns are late.
Expiry of individual points over time
Points will have a lifetime of two years, after which they will expire. This will be calculated from the month after the month in which the failure occurred.
Points will not expire when a taxpayer is at the penalty threshold. This ensures they must achieve a period of compliance to reset their points (see below).
After a taxpayer has reached the penalty threshold, all the points accrued within that points total will be reset to zero when the taxpayer has met both the following conditions:
- a period of compliance (that is, meeting all submission obligations on time for the period of compliance – see table below); and
- the taxpayer has submitted all the submissions which were due within the preceding 24 months. It does not matter whether or not these submissions were initially late.
The periods of compliance are shown in the table below:
|Submission frequency||Period of compliance|
|Quarterly (including MTD for ITSA)||12 months|
HMRC has the following time limit to apply points; it cannot apply a point after the times specified below:
|Submission frequency||Time limit for levying a point|
|Quarterly (including Making Tax Digital)||11 weeks|
The time limit for HMRC to assess a financial penalty will be two years after the failure which gave rise to the penalty.
Where HMRC discovers that a customer had previous submission obligations which HMRC was unaware of at the time, HMRC will also have 12 months from the date of the discovery to levy points and financial penalties.
If taxpayers have a ‘reasonable excuse’ for missing the deadline, they can appeal against a point or against a financial penalty through both an internal HMRC review process and an appeal to the courts (the First Tier Tax Tribunal).
As a consequence of the new points-based penalty regime, Finance Bill 2021, Sch. 24 also provides for a new deliberate withholding penalty. The penalty closely replicates the existing tax-geared late filing penalties for deliberately withholding information but will work with the new points-based late filing penalty regime.