New penalty regime for late filers and late payers

Following the publication of the draft provisions for Finance Bill 2018-19 (“the draft provisions”) and explanatory notes on 6th July 2018, Government published a range of policy papers and draft legislation.

Late submission penalties

A new penalty regime titled the “points-based model” will be implemented for certain taxes where taxpayers either fail to meet their submission obligation on time and/or fail to make payment on time.

Initially this measure will apply to Income Tax Self Assessment returns and VAT returns only but excise, environmental, insurance and transport taxes are included within the scope of the legislation, with a plan to implement changes to these taxes at a later date and, following this, Government intends to extend the new model to Corporation Tax too.

The new measure contained within the draft provisions introduces the new points-based penalty regime for regular submission obligations such as filing a self-assessment tax return and replaces the existing penalties for the taxes in scope.

Depending on the frequency of the obligation to submit a particular return, a number of penalty points will accrue. Once the threshold has been reached, a fixed penalty will be chargeable to the taxpayer.

After the threshold is breached, subsequent late submissions will result in a fixed penalty being charged until the taxpayer maintains a period of submission compliance. Once the taxpayer has achieved a period of compliance and all returns for the preceding 24 months have been submitted, the points will be reset to zero.

Points generally have a lifetime of 24 months after which they expire, so if a taxpayer accrues points but does not reach the threshold, the points will expire after 24 months. Points will accrue separately per submission obligation.

Legislation will be introduced in Finance Bill 2018-19 to create two new schedules. The first schedule will provide for the new points-based late submission penalty regime and the second will make minor updates to the deliberate withholding penalty which is currently set out at paragraph 6 of Schedule 55 to Finance Act 2009.

Draft legislation was published on 6th July 2018. The intention is to stage implementation of the points-based model commencing with VAT filing obligations from 1 April 2020. A timetable for the new model being implemented into self-assessment obligations will be announced in due course. 

See our previous news on the points-based model.

Interest harmonisation and sanctions for late payment

Additionally, another policy paper was published containing a key provision to change the way interest is charged and repaid for Value Added Tax (“VAT”) so that it is more aligned with the rules for charging and repaying interest on Corporation Tax (“CT”) and income tax self-assessment (“ITSA”). The policy paper also includes a measure to harmonise late payment penalties in CT, ITSA and VAT.

Interest

The VAT interest rules will change and will be similar to those that currently exist in ITSA and CT. The measure will make the following changes to interest payments in VAT:

• General Rule: when an amount is not paid by the due date, late payment interest will be charged to the taxpayer from the date that the payment was due until the date that the payment is received
• Interest on amounts due to Taxpayers: HMRC will pay repayment interest when it has held taxpayer repayments for longer than it should

Interest will be calculated as simple interest and not as compound. Revisions of the way interest is charged and repaid for VAT are expected to be implemented from 1 April 2020.

Penalties

This measure will also align late payment penalties in CT, ITSA and VAT. Late payment penalties are charged when customers do not pay, or make an agreement to pay, by the date they should and do not have a reasonable excuse for the failure to do so.

The penalties will consist of 2 penalty charges, one charge based upon payments and agreements to pay in the first 30 days after the payment due date and the second based upon how long the debt remains outstanding after the 30 days.

HMRC expects to publish updated tax information and impact notes when further details including the penalty rates are announced. The measure will be introduced alongside the related late submissions penalty regime. See our news on this measure here.

The new late payment penalties are expected to commence for VAT on 1 April 2020. A timetable for implementation for ITSA and CT will be announced in due course.

Draft legislation for both the changes to the interest rules for VAT and the late payment regime have been published.

Aspire Comment

The new points-based model for late filers will benefit individuals who have on occasion made a genuine mistake and not filed their return on time as they will now avoid instant penalties being charged prior to breaching the threshold.

The late payment changes to CT, ITSA and VAT are expected to affect as many as 6 million businesses and individuals whilst the changes to the way interest is repaid and charged for VAT is expected to affect only 2.3 million businesses.

It is expected that the changes to both late payment and interest for VAT will initially impose a significant additional administrative burden on businesses with the cost of familiarising relevant staff with the new rules. On-going costs may be reduced where a business does not choose to query penalties where there will be no financial implication.

If you would like to discuss any of the changes announced in the draft provisions, please get in touch with Aspire.