Originally a new penalty regime was expected from April 2020 when the soft-landing for MTD for VAT ended, but that was shelved because of the pandemic. Subsequently the Finance Act 2021 included provisions for a new penalty regime to be introduced from April 2022. This has now been delayed until January 2023.
Reading between the lines of the announcement, the delay appears to be to allow extra time for testing the new IT systems that will be needed to operate the new penalty structure efficiently and consistently.
The Finance Act 2021 provisions introduce a two-tier penalty system, and like all good penalty shoot-outs, a missed deadline produces more pressure on the next deadline. Fortunately, unlike other penalty shoot-outs, there isn’t a sudden-death phase!
The proposed regime works a bit like points on a driving licence and is as follows:
- If a return deadline is missed, then the trader will accrue one point.
- For each missed deadline another point will be accrued.
- The points have a lifetime of two years, after which time they drop off the record.
- Once a threshold has been breached, there’s a penalty for each late return of £200.
- The penalty thresholds are dependent on the frequency of the VAT return cycles and are:
The penalty regime will be mirrored in other taxes, so on the introduction of MTD for income tax, currently scheduled for April 2024, if a taxpayer has a quarterly filing obligation, then a missed quarterly return will accrue one penalty point, but no penalty until the 4 point threshold is breached. Each tax will have a separate accumulating points total, so missing VAT return deadlines should not impact on income tax deadlines and penalties.
The second tier of the penalty regime relates to late payments. This also comes in various parts. The initial penalty arises on any tax that is still unpaid 15 days after the due date, when a 2% levy on the amount still outstanding becomes chargeable. If amounts are still outstanding 30 days after the due date, then there is a charge of 4% of the amount outstanding. For amounts that remain outstanding beyond 30 days, there is then a daily penalty calculated at 4% per year for the number of days that tax remains due. HMRC will have a time limit of 2 years from the missed deadline to assess any penalties.
As might be expected, there continues to be late payment interest chargeable, which is calculated at a rate 2.5% above the Bank of England base rate.
The next steps
If you have any problems meeting tax return deadlines of any sort, or have received a penalty assessment that you believe is not justified, contact John Sheehan or your usual UHY adviser.
