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Reforming of penalties for self-assessment late payments and submissions to align with MTDSA

Reforming of penalties for self-assessment late payments and submissions to align with MTDSA

Mike Wakeford

This new measure will affect taxpayers and those who act on behalf of taxpayers who are required to submit either a VAT return or an Income Tax Self-Assessment (ITSA) return, more specifically those who fail to submit returns or pay on time. It will be a points-based penalty regime for regular tax return submission obligations.

This reform will replace the current penalties and will come into effect for VAT taxpayers for accounting periods on or after 1 April 2022. And for Income Tax Self-Assessment (ITSA) customers with business or property income over £10,000 per year (only those who are required to submit digital quarterly updates through 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.

The purpose of the new policy is to make penalties for failing to pay or file on time simple, fair and effective, and to strengthen confidence in the tax system. The system is intended to focus on the small minority who continually fail to comply by missing filing and payment deadlines, while being more lenient on those who occasionally slip up.  

Interest harmonisation

The VAT interest rules will change and will be similar to those that currently exist in ITSA, as a simplification measure and to try to align rules and deadlines across the board. The new measure will introduce the following changes to interest payments:
  1. Should an amount not be paid by the due date, late payment interest will be charged to the taxpayer from the date that payment was due until the payment is received by HMRC
  2. HMRC will issue repayment interest on both any overpaid tax or tax refunds due to be paid
What are the proposed revisions?

In this fairer system, late submission penalties will be points-based, meaning the approach is not to look at applying a financial penalty to every missed obligation, but for points to build up for each default with financial penalties only applying when a certain number of points have built up.

For example, MTD ITSA taxpayers with a previously clean record will have to miss four quarterly submission deadlines before facing a financial penalty of £200. The government is hoping the penalty system sanctions will encourage compliance with the new quarterly and end of period statement obligations. Each obligation will count as a point.

The level of points threshold depends on the taxpayers submission frequency:
  • 2 points – Annually (24 months)
  • 4 points – Quarterly (12 months)
  • 5 points – Monthly (6 months)
The points can be reset to zero at any time if both of the following conditions are met:
  1. Submission of returns on or before the due date, for a period of time based on their submission of frequency.
  2. All returns that were due within the preceding 24 months have been received. 
Late submission and payment penalties

Legislation will align the late payment penalty regime across the main taxes. Any current late payment sanctions will be replaced.  If you receive a late penalty, it will come in 2 separate charges.
  1. The first charge will be payable 30 days after the payment due date and will be based on a set percentage of the outstanding balance. The amount will depend on payments made or time to pay arrangements (TTP) agreed with HMRC.
  2. The second charge will be payable from day 31 and will accrue on a daily basis based on the amounts outstanding. Time to pay arrangements can also be agreed with HMRC for the second charge. If a TTP is agreed the penalty will stop accruing from the date the taxpayer proposes it.
Charge Action Penalty
First If the taxpayer pays within 15 days after the due date No penalty
First If the taxpayer pays between 16 and 30 days after the due date 2% of the outstanding amount
First Tax left unpaid 30 days after the due date 2% of the outstanding amount at day 15 and 2% of the outstanding amount at day 30
Second A second late payment penalty 4% per annum based on a daily basis on the total unpaid tax from day 31


Similar to other tax penalties, a taxpayer will not have to take a penalty or the points if there is a reasonable excuse for not making the relevant submission or payment on time and will have a right to appeal against both.

If the taxpayer continues to miss submission deadlines after they have reached the points threshold and have been issued with a penalty, they will become liable for a further fixed rate penalty for each additional missed obligation. This will still apply even if the fixed rate penalty has been paid.

If you require advice or assistance with the above, please contact your local Moore adviser.