Penalties for late submission
HMRC has published a new policy paper on penalties for late submission that will apply to VAT and Income Tax Self Assessment from 1 April 2023 (delayed by a year at HMRC’s request). This is reproduced in full below.
Introduction
The government is reforming sanctions for late submission and late payment to make them fairer and more consistent across taxes. The changes will initially apply to VAT and Income Tax Self Assessment (ITSA).
The new late submission penalties will affect those who fail to meet their obligations to provide returns and other information requested by HMRC on time. Taxpayers will no longer receive an automatic financial penalty if they fail to meet a submission obligation. Instead, they will incur a certain number of points for missed obligations before a financial penalty is levied. This new points-based regime is designed to be proportionate, penalising only the small minority who persistently miss their submission obligations rather than those who make occasional mistakes. The regime is designed for taxes with regular submission obligations.
The changes will apply to VAT customers for accounting periods beginning on or after 1 April 2023, to ITSA customers with business or property income over £10,000 per year (who are mandated for Making Tax Digital (MTD) for ITSA) from the tax year beginning 6 April 2024, and for all other ITSA customers from the tax year beginning 6 April 2025.
This technical note accompanies the relevant draft legislation and explanatory note and should be read in conjunction with the accompanying technical note for new late payment penalties and interest harmonisation.
Late Submission Penalties
The new points-based penalty regime will initially apply only to those taxpayers who have submission obligations for VAT and ITSA with a regular frequency (for example, monthly, quarterly or annually). A regular submission obligation can be a return or an MTD regular update. It will not apply to other occasional submissions (for example a submission required for a one-off transaction), which will continue to be covered by the current penalty regime for the relevant submission.
The changes also make minor updates to, and replace, the deliberate withholding penalty for ITSA previously set out in paragraph 6 of Schedule 55 to Finance Act 2009 (FA 2009) so it works effectively with the new points-based approach.
Overview of how the new Late Submission Penalties work
Taxpayers will receive a point every time they miss a submission deadline. HMRC will notify them of each point. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The threshold is determined by how often a taxpayer is required to make their submission.
When a taxpayer has reached the relevant threshold, as determined by their submission frequency, a penalty will be charged for that failure and every subsequent failure to make a submission on time, but their points total will not increase.
The penalty thresholds will be as follows:
| Submission frequency | Penalty threshold |
|---|---|
| Annual | 2 points |
| Quarterly (including MTD for ITSA) | 4 points |
| Monthly | 5 points |
Separate points totals
Taxpayers will have one points total 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 the group of annual returns for the late ITSA return, and one for the group of quarterly returns for the late VAT return. If both returns had 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.
More than one failure in a month
In general, if a taxpayer makes two or more failures relating to the same submission obligation in the same month, they will only incur a single point for that month. This is to prevent a taxpayer reaching the points threshold too rapidly to be able to improve their compliance.
However, there are exceptions to this rule.
The maximum of one point per month for two or more failures relating to the same submission obligation in the same month will not apply across different MTD for ITSA submission obligations. So, if an ITSA taxpayer has a quarterly regular update deadline, an End of Period Statement (EOPS) deadline and a Final Declaration deadline in the same month, they can accrue three points if they miss all three deadlines.
Where a taxpayer with MTD for ITSA submission obligations has two or more businesses (and is therefore required to submit separate regular updates and EOPS for each business), they will have one points total for all those submissions for different businesses. Where the taxpayer submits one or more of each of the different types of submissions late, they will only accrue a maximum of one point. For the purposes of this rule, tax year quarters will be used (rather than business accounting period quarters, which differ from business to business).
For example, if a taxpayer has three businesses and they fail to meet an ITSA regular update deadline falling in quarter 1 for either one, two or three of their businesses, they will accrue one point. If the same taxpayer fails to meet the EOPS deadline for either one, two or three of their businesses, they will accrue an additional point. If the same taxpayer fails to provide their Final Declaration by the deadline, they will accrue an additional point.
Expiry of individual points over time
To prevent historic failures combining with occasional recent failures to cause a financial penalty, 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 ‘Expiry of points for good compliance’ below).
Expiry of all points for compliance
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.
Both requirements must be met before points can be reset.
The periods of compliance are:
| Submission frequency | Period of compliance |
|---|---|
| Annual | 24 months |
| Quarterly (including MTD for ITSA) | 12 months |
| Monthly | 6 months |
If a taxpayer is at the penalty threshold and has achieved the period of compliance, but has not submitted outstanding submissions, they will remain at the penalty threshold and continue to be charged penalties for any further failures to make submissions on time.
Time limits
There will be time limits after which a point cannot be levied.
The time limits for levying a point depend on the taxpayer’s submission frequency and start from the day on which the failure occurred, as follows:
| Submission frequency | Time limit for levying a point |
|---|---|
| Annual | 48 weeks |
| Quarterly (including Making Tax Digital) | 11 weeks |
| Monthly | 2 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 a Tribunal decision results in the cancellation of a point or a financial penalty, HMRC will have 12 months from the date of the Tribunal decision to levy a point or financial penalty that would have accrued for failures that occurred but were not added to the points total because the taxpayer was at the penalty threshold.
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.
Where HMRC has discretion not to apply a point or penalty
HMRC will ordinarily levy a point and a financial penalty when a submission is late.
However, HMRC has discretionary power not to levy a point or charge a penalty in relation to an individual taxpayer or group of taxpayers if they consider it appropriate to do so in the particular circumstances. Any use of this discretionary power by HMRC will be carefully considered and exercised in line with published guidance. However, where HMRC has already levied a point or penalty, taxpayers must use the reviews and appeals process to challenge this decision.
Reviews and appeals
A taxpayer will be able to challenge a point or penalty through both an internal HMRC review process and an appeal to the courts (the First Tier Tax Tribunal). The grounds for an appeal will include the grounds that the taxpayer had a reasonable excuse for missing a filing deadline. The appeal process will be the same as the appeal process against an assessment of tax for the relevant tax on which the penalty is based.
Special cases
Changing frequency of reporting
In many taxes (including VAT), taxpayers can request changes to how often they submit returns if they meet certain conditions. For example, a taxpayer can ask to submit VAT returns monthly, quarterly or annually.
To avoid penalising those who need to change their filing frequency, for example, if HMRC asks a business to report their VAT quarterly or monthly rather than annually, the following mechanism will adjust the taxpayer’s points total according to the change they are making. The only exception will be if a taxpayer has zero points for the old frequency of submissions, in which case, they will remain on zero points for the new frequency of submission. This system ensures that no taxpayer will be penalised merely for changing their submission frequency.
| Change in reporting frequency | Adjustment to points total |
|---|---|
| Annual to quarterly | +2 points |
| Annual to monthly | +3 points |
| Quarterly to annual | -2 points |
| Quarterly to monthly | +1 point |
| Monthly to annual | -3 points |
| Monthly to quarterly | -1 point |
A taxpayer cannot have a negative number of points so if the adjustment would lead to a negative number, the taxpayer will be treated as having zero points.
Where a taxpayer has points deducted from their total it is the most recent points that will remain (and therefore relevant time limits will be calculated from the most recent points).
Where a taxpayer has points added to their total, they will be treated as having been incurred at the same time as the most recent existing point. Therefore, relevant time limits will be calculated from the most recent point.
VAT groups
Where a VAT group has incurred penalty points and the representative member of that group is replaced, the new member will be treated as having the same number of penalty points as the previous member.
Where a VAT group has incurred penalty points and a new group member joins, the penalty points for that group will continue unchanged.
Where a group member leaves a VAT group which has incurred penalty points and registers as a separate taxable person with a new VAT registration number, they will start with zero points. The previously incurred penalty points will remain with the original VAT group.
Where a new VAT group is formed, there will be a new taxable person with a new VAT registration number and any penalty points previously incurred by group members will not be transferred to the new group.
Non-standard accounting periods
In some taxes (including VAT) taxpayers can ask if they can provide submissions for non-standard accounting periods. Where such periods are transitional, they will be excluded from submission obligations considered as part of the new points-based penalty regime. For example, these transitional periods include those at the beginning or end of a period of VAT liability, or where a taxpayer wants to change the frequency of their filing obligation. The exception for transitional periods will not apply to deliberate failures to submit. HMRC has the power to vary VAT return periods where it considers it necessary.