What is the new HMRC late submission penalty scheme for tax payments?

30 October 2023

HMRC have overhauled their penalty scheme for late submission of VAT, replacing the default surcharge model for a new penalty points system. Jonathan Munnery, insolvency and company restructuring expert at UK Liquidators, discusses how the new points-based system works.

The penalty points system became effective for VAT return periods starting January 2023 onwards, and aims to provide more leniency towards companies that have an overall good track record of making their VAT submissions in time, yet find themselves struggling to meet the deadline on an occasional basis. Those who frequently fail to make their VAT submissions on time, will continue to accrue financial penalties until their account is brought up to date.

How does the penalty points scheme work and how does it differ from the surcharge system?

Under the old surcharge system, a fine was automatically issued for any instance of late submission of VAT and Income Tax Self Assessment (ITSA). There was no forgiveness for a one-off late submission.

With the new points-based scheme, however, fines are not automatic. Instead, each instance of late submission will attract a ‘penalty point’. Each taxpayer responsible for submitting a VAT or ITSA return will be given a penalty point threshold. Only once this threshold is reached, will a £200 fine be issued. From this point, fines can mount up rapidly as each missed deadline from this point onwards will attract another £200 fine until the taxpayer complies with their VAT submission duties.

What are the penalty point thresholds?

A taxpayers penalty point threshold will be determined by the regularity they are obligated to submit a return, whether annually, quarterly, or monthly.

For those required to submit an annual return, they will have a threshold of two penalty points. A taxpayer who submits quarterly returns will have a threshold of four penalty points, while those submitting their VAT returns monthly will only reach the threshold once they accrue five penalty points. Once the threshold is reached, any subsequent missed filing deadlines will come with an automatic £200 penalty.

What happens if submission frequency is changed?

It is still possible to change the submission frequency of when returns need to be filed under the penalty points system; this change may be entered into voluntarily or at the request of HMRC. While the threshold level is set according to the submission frequency at the start of the returns period, this will be amended if the submission frequency changes. For example, if the submission of VAT returns goes from quarterly to monthly, the taxpayer’s penalty points threshold will be increased from four to five to account for this change.

Do penalty points expire?

Penalty points will expire after two years as long as the taxpayer has not reached the threshold. For example, if a taxpayer submitting quarterly returns accrues two penalty points over the space of two years, they will not have reached the threshold of four penalty points, meaning the two points will drop off two years after they were issued.

If the threshold has been reached, however, things are not so simple. The taxpayer must demonstrate a ‘period of compliance’ before the penalty points will be removed. The period of compliance involves two conditions being met:

1.       All outstanding VAT submissions for the previous 24 months must be brought up to date and filed correctly

2.       Any submissions due during the period of compliance must be filed correctly and on time

The duration of the period of compliance will be calculated on how frequently returns are required to be submitted. Those submitting annual returns will be required to serve a 24-month period of compliance, quarterly submissions will be obligated to serve a 12-month period of compliance, while a 6-month period of compliance will need to be observed for those who make monthly VAT submissions. Once the period of compliance has been successfully adhered to, the taxpayers penalty points will be removed from their record.

While the new scheme does allow for the occasional missed deadline, those responsible for submitting VAT returns should still make it a priority to ensure they comply with their obligations and file on time. It is surprisingly easy for one missed submission to escalate into several, and once the penalty points threshold has been reached, this will come with a cost.