The New HMRC late payment penalty regime

1. LPP

What is the aim?

• To bring the LPP regime in line for both VAT and income tax.

When will the new penalty regime start?

• For VAT – From 1^st January 2023.
• From an income tax perspective, for those self-employed and property landlords who will be caught by Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) – From 6^th April 2024.
• For those remaining taxpayers still caught up within the SA Return system – From 6^th April 2025.

How will the new LPP system work?

• There will be two potential penalties – known as the first and second penalty.
• The taxpayer can enter into an agreed time to pay arrangement with HMRC that will stop penalties accruing from that day onwards, as long as they honour the agreement.

How does the first penalty work?

• If the tax is still outstanding 15 days after it is due, then a LPP of 2% of the tax due will be charged.
• If the tax is still outstanding 30 days after it is due, then a further LPP of 2% of the tax due will be charged.

How does the second penalty work?

• If the tax is still outstanding 31 days after it is due, then a penalty will accrue on a daily basis at a rate of 4% per annum.

Example of how it will work

• Nathan owes £10,000 in tax and fails to pay by the due date and has still not paid 40 days on from there.
• On day 40 he enters into a time to pay arrangement with HMRC.
• Nathan has already incurred the 4% first penalty of £400
• He has already incurred the second penalty, at a daily rate of 4% per annum, for the 10 days which has accrued up to day 40. In his case a further £11 (approx.).
• This second penalty stops accruing at this point as Nathan has entered into a time to pay agreement.

When can the LPP be avoided?

• By paying the tax due within 15 days of the due date.
• If the taxpayer has a reasonable excuse for the late payment.
• The taxpayer can ask for HMRC to review the LPP imposed.
• The taxpayer can appeal to the courts against the LPP.
• HMRC will take a light-touch approach in the first year of operation of the new system under both VAT and MTD ITSA.
• In the first year, HMRC will not impose the initial 2% penalty as long as the taxpayer has either, paid the tax within the first 30 days it was due, or they have approached the Revenue to enter into a time to pay arrangement within that same period.

Important to note

• On top of the LPP, interest will be charged on the outstanding tax from the due date until it is finally paid.
• The interest will be charged at a rate of 2.5% above the Bank of England base rate.
• Where the taxpayer has overpaid, the repayment supplement will be 1% below the Bank of England base rate (with a minimum rate of 0.5%).
• This should not be confused with the new HMRC late submission penalty regime, which is coming in at the same time.

Tip

• If you believe you are not in a position to be able to make the tax payment, don’t leave it until the last minute to contact us or HMRC to reach a time to pay agreement.
• By entering into discussion early with HMRC you have a chance to mitigate the size of any penalty or even prevent a penalty arising in the first place.

2. LSP

When will the LSP regime start?

• For VAT – From 1^st January 2023.
• From an income tax perspective, for those self-employed and property landlords who will be caught by Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) – From 6^th April 2024.
• For those remaining taxpayers still caught up within the SA Return system – From 6^th April 2025.

How will the new LSP regime work?

• It will be based upon a points system.
• Each late submission will result in a penalty point until you reach the penalty threshold.
• Once the threshold has been reached a penalty will be charged.
• The penalty has initially been set at £200.
• Every late submission after the threshold has been met will result in a further penalty of £200 being charged. No additional points will be added. 

What is the penalty point threshold?

• It will depend upon which threshold group the submission falls within.
• The groups are based upon how frequently a submission is required to be filed during a year, as per the table below:

What type of submissions will be affected by this?

• VAT returns could fall into either of the three groups depending upon your individual circumstances.
• Self-employed individuals who will need to register for MTD ITSA. Their quarterly submissions will fall within the quarterly penalty frequency group.
• Property landlords who will need to register for MTD ITSA. Their quarterly submissions will fall within the quarterly penalty frequency group.
• The annual MTD submissions such as the end of period statement (EPOS) and the finalisation statement will both be within the annual penalty frequency group.
• Those who continue to complete and submit a Self-Assessment tax return or a Trust return, will also fall within the annual penalty frequency group.

When do the penalty points expire?

• Where you have not reached the penalty threshold, the points will expire after two years.
• Where you have reached the penalty threshold, points will not expire after two years but will endure until you are fully compliant during what HMRC call a ‘period of compliance’
• The ‘period of compliance’ depends upon the penalty frequency group involved, as per the table below:

Can you appeal against a penalty point and/or the penalty itself?

• You can ask that HMRC carry out an internal review on the decision.
• You can appeal to the courts.
• The grounds of the appeal has to be based upon reasonable excuse for missing the filing date.

What happens if you change the frequency of the submission?

• In many taxes (e.g. VAT), you can request changes to how often you submit returns if you meet certain conditions.
• Where you change the frequency of your filing obligation (for example, changing the filing for VAT returns between monthly, quarterly and annually) and you have outstanding unexpired points, then your points total will be increased if the filing obligation becomes frequent and reduced if it becomes less frequent.
• The change in the points system is reflected in the table below:

Important factors to note

• Where you make quarterly submissions for both VAT and MTD ITSA, each one is looked at separately and has its own penalty point threshold.
• Penalty points arising on the late submission of EPOS and/or the finalisation statement will not be linked to the MTD quarterly filing penalty threshold.
• Where a person carries on more than one business and files their quarterly updates in different months, only one point will be levied per quarter, regardless of how many businesses fail to file that quarter period. Tax year quarters will apply in this case.
• This should not be confused with the new HMRC late payment penalty regime, which is coming in at the same time.

Tip

• Is it worth considering aligning the VAT quarterly submissions with the MTD ITSA quarterly filing dates?
• Make a diary note of the filing dates so that penalty points do not arise.
• Take note of any legitimate reasonable excuse for delay in submissions and ensure that the timing of the filing of the return does not go beyond that ‘reasonable excuse’ expiry period.

If you wish to discuss the New HMRC Late Submission Penalty Regime or other issues please do contact us.