New Penalties and Interest Harmonisation for Income Tax Self-Assessment (ITSA) and VAT
A new penalty and interest regime was announced in the Budget, which applies a common approach to both VAT and self-assessment. The new regime comes into effect as follows:
- For VAT, accounting periods beginning on or after 1 April 2022 (from when Making Tax Digital will apply to all VAT registered businesses)
- For ITSA taxpayers with business or property income over £10,000, for accounting periods beginning on or after 6 April 2023 (from when taxpayers will have to submit quarterly MTD Returns)
- For other ITSA taxpayers, for accounting periods beginning on or after 6 April 2024
Penalties for late submission of Returns (VAT, ITSA and MTD) will be based on a points-based system (driving licence style). One point will be received when a filing deadline is missed. Points are totalled separately for each type of Return and there is a points threshold depending on their frequency. For annual Returns the threshold is 2 points, for quarterly Returns the threshold is 4 points and for monthly Returns it is 5 points.
A fixed penalty of £200 will be charged when the points threshold is reached for that particular Return. For example, there will be a penalty of £200 if the annual self-assessment tax Return is late twice. Separately there will be a £200 penalty if 4 quarterly VAT Returns are late. A further £200 penalty will be incurred for each missed deadline after reaching the threshold on that particular Return.
Points will expire after 24 months provided the taxpayer remains below the threshold.
When the threshold has been reached all points will expire after Returns have been submitted on time for a set period depending on their frequency: for annual Returns the period is 24 months, for quarterly Returns the period is 12 month and for monthly Returns the period is 6 months.
This approach will not punish ITSA taxpayers who make a one-off failure to file a return on time, unlike now.
Separately to the late filing penalty there are also penalties for the late payment of tax and VAT. Firstly a penalty of 2% of the unpaid tax is charged for payments made more than 15 days late, rising to 4% if it is still unpaid after 30 days. A further penalty of 4% pa is charged on tax more than 30 days late, accruing on a daily basis.
The VAT Default Surcharge, a combined late submission and late payment sanction, will be replaced by the new regime.
Finally, interest will be charged on late payments of VAT in the same way that it applies to ITSA, at the rate of 2.5% plus Bank of England base rate, calculated from the date that payment became due to the date it is received by HMRC.