HMRC outlines changes to late payment penalty regime

The government has set out how they are planning to reform the penalties for late submission and late payments, making them ‘fairer and more consistent across taxes’. The changes will apply to VAT and Income Tax Self Assessment (ITSA).  

When the changes come into place, they will see interest charges and repayment interest for VAT brought in line with other tax regimes, including ITSA.

There are two late payment penalties that may apply as part of the new scheme:

  1. Initial penalty
  2. An additional penalty, with an annualised penalty rate.

All taxpayers have a legal obligation to pay their tax by the due date. They will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. The penalty is set at 2% of the tax outstanding after day 15.

If any of the tax is still unpaid after day 30 the penalty will be calculated at 2% of the tax outstanding after day 15 plus 2% of the tax outstanding after day 30. If the tax remains unpaid on day 31 the taxpayer will begin to incur an additional penalty on the tax remaining outstanding. This will accrue at 4% per annum.

It is possible to request a Time To Pay arrangement from HMRC, stopping a penalty from accruing by agreeing on a schedule for making any outstanding payments.

For VAT payers, the rules will take effect from VAT periods starting on or after 1 April 2022. The changes will take effect for taxpayers in ITSA from accounting periods beginning on or after 6 April 2023 for those with business or property income over £10,000 per year or accounting periods beginning on or after 6 April 2024 for other ITSA taxpayers.

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