Late-payment penalty calculations

Last month, an ACCA article highlighted the proposed new points-based penalty regime for late filing of self-assessment and VAT returns. Now HMRC has announced changes to the late-payment penalty scheme, which will begin to come into effect from April 2022.

Proposed effective dates

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
• income tax self-assesssment (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
• all other ITSA taxpayers for accounting periods beginning on or after 6 April 2024.

Current late payment of income tax penalty

At present, if self-assessment tax is paid late, tax-geared penalties are levied at flat rate of 5% based on the tenure of delay.

Current law for late payment penalties in ITSA is contained in FA 2009 Schedule 56, table items 1, 12 and 17 to 19, and paragraphs 3 and 9 to 17.

For example, if the tax for 2018/19 is not paid on time, the following liabilities are accrued:

Proposed late payment penalties for VAT and ITSA

Instead of the current fixed penalties on the specific dates, HMRC has proposed to bring daily penalties for late payment of taxes. Additionally, the period when these penalties are triggered is accelerated too as below:

• first penalty incurs after day 15 (instead of current 30 days)
• second penalty incurs after day 30 (instead of current six months)
• additional daily penalty will be incurred from day 31 onwards until fully paid.

For example, if the tax for 2023-24 is not paid on time, the following liabilities are accrued:

Current late payment of VAT penalty

For VAT there is currently no standalone late payment penalty. Instead Default Surcharge applies in accordance with sections 59, 59A and 59B of the Value Added Tax Act 1994, which is a combined sanction for late submission and late payment penalty.

The above proposed late payment penalties system will replace the Default Surcharge penalty for VAT noncompliance. The changes will apply to VAT taxpayers for the accounting periods beginning on or after 1 April 2022.

How to prevent the penalty accruing

The taxpayer can make a time to pay agreement with HMRC and the penalty is suspended at that point.

Additionally, there is no penalty due if the taxpayer has a reasonable excuse for late payment. Where the reasonable excuse for late payment comes to an end, the taxpayer will not incur a late payment penalty if they then pay the tax promptly.

HMRC has confirmed ‘a light-touch approach’ to the initial 2% late payment penalty for taxpayers in the first year of operation of the new system under both VAT and ITSA. In the first year, where a taxpayer is doing their best to comply, HMRC will not assess the first penalty at 2% after 15 days, allowing taxpayers 30 days to approach HMRC before HMRC charges a penalty.

If HMRC decides not to use its discretionary power or does not agree that a taxpayer has a reasonable excuse for late payment, the taxpayer must use the appeals and review process to challenge a penalty. The taxpayer has 30 days to lodge an appeal with HMRC against a tax penalty.

Useful resources

HMRC guidance