Changes to late payment penalty regime for taxpayers

HMRC has clarified changes to the late payment penalty scheme which will start to come into force from April 2022.

There are two late payment penalties that may apply; a first penalty and then an additional or second penalty, with an annualised penalty rate. All taxpayers, regardless of the tax regime, have a legal obligation to pay their tax by the due date for that tax.

The taxpayer will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. If tax remains unpaid after day 15, the taxpayer incurs the first penalty. This penalty is set at 2% of the tax outstanding after day 15. If any of this tax is still unpaid after day 30, the penalty will be calculated as 2% of the tax outstanding after day 15 plus 2% of the tax outstanding at day 30. In most instances this will amount to a 4% charge at day 30.

If tax remains unpaid on day 31, the taxpayer will begin to incur an additional penalty on the tax that remains outstanding. It accrues on a daily basis, at a rate of 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the tax that is due.

HMRC has discretionary power to reduce or not to charge a penalty for late payment if it considers that appropriate in the circumstances. This will include where there are special circumstances that cause a taxpayer to pay their tax late. HMRC recognises that moving to the new system of late payment penalties is a significant change for some taxpayers, especially those who might have more difficulty in getting in contact with HMRC within 15 days of missing a payment to begin arranging a time-to-pay agreement. HMRC has confirmed that it will take ‘a light-touch approach to the initial 2% late payment penalty for customers in the first year of operation of the new system under both VAT and ITSA’. 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 in the first year before HMRC charges a penalty.

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.

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 reforms come into effect for VAT taxpayers from periods starting on or after 1 April 2022, and for taxpayers in income tax self assessment (ITSA), from accounting periods beginning on or after 6 April 2023 for taxpayers with business or property income over £10,000 per year (that is, taxpayers who are required to submit digital quarterly updates through Making Tax Digital for ITSA).

For all other taxpayers in self assessment, the changes will apply from accounting periods beginning on or after 6 April 2024.

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