Interest harmonisation and sanctions for late payment
Published 6 July 2018
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Who is likely to be affected
Taxpayers who fall within Corporation Tax, Income Tax Self-Assessment (ITSA) and VAT. Agents, or others acting on behalf of taxpayers, will also be affected because they will need to understand the new rules.
General description of the measure
The measure proposes two changes, one to the way that interest is charged and repaid for VAT and another to penalties for late payment.
Interest
The VAT interest rules will change and will be similar to those that currently exist in ITSA and Corporation Tax. 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.
Penalties
This measure will also harmonise late payment penalties in Corporation Tax, 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 another charge based upon how long the debt remains outstanding after the 30 days.
HMRC expects to publish an updated tax information and impact note when further details of the regime, including the rates of the penalty, are announced. This measure will be introduced alongside the related late submissions penalty regime as a package.
Policy objective
The government wants to encourage taxpayers to pay on time. This measure will introduce a late payment penalty regime that is designed to be fair to those that want to pay on time. The changes will ensure that people who pay late can avoid a penalty if they take action to make arrangements to pay, and that those that do not will receive a penalty that is proportionate to both the value of the debt and the amount of time it is outstanding for.
The measure is designed to encourage those who cannot pay to agree a Time to Pay arrangement as quickly as possible and only penalise those who do not.
Simplifying and harmonising late payment penalties and interest will make the tax administration system clearer and simpler for taxpayers, ensuring that it is as easy as possible for them to comply with their obligations across taxes.
The changes to interest in VAT will make it simpler for taxpayers to understand the interest they pay, or are paid when HMRC owes money. This measure will align the interest charges and associated late payment penalties in VAT with those for Corporation Tax and ITSA.
Background to the measure
The measure has been designed to simplify and further align late payment penalties and interest across taxes. Late payment penalties for VAT, known as default surcharge, and repayment supplement were introduced in the mid 1980’s and will now be replaced by late payment interest, repayment interest and late payment penalty. Finance Act 2009 (FA 2009) rules introduced the current law on ITSA late payment penalties.
This measure has been developed through three previous consultations. The first ‘Making Tax Digital: Tax Administration’ ran from 15 August 2016 to 7 November 2016. This consultation proposed models for a late submission penalty, as well as options for a separate late payment penalty. Initial comments were also sought in this consultation for alignment of the HMRC interest rules.
The second consultation- ‘Making Tax Digital: sanctions for late submission and late payment’ ran from 20 March 2017 to 11 June 2017. Here, further models were proposed for a late submissions penalty whilst views were also sought on a penalty interest model for the late payment penalty.
The third consultation- ‘Making Tax Digital: Interest harmonisation and sanctions for late payment’ ran from 1 December 2017 to 2 March 2018. This consultation focused on aligning interest for monies owed to and by HMRC as well as proposing another model for the late payment penalty. The response document to this consultation was published on 6 July 2018. The feedback after each of the aforementioned consultations has been used to develop and refine this measure.
Draft legislation was published for consultation on 6 July 2018.
Detailed proposal
Operative date
A staged implementation of the measure is expected starting with VAT from 1 April 2020.
Interest revisions for VAT are expected to be implemented for VAT returns starting on or after 1 April 2020.
New late payment penalties are expected to commence for VAT on 1 April 2020. A timetable for implementation for ITSA and Corporation Tax will be announced in due course.
Current law
Interest
For Corporation Tax, the current law for charging interest to customers is included in the Taxes Management Act 1970, S87A. For interest paid to customers, the legislation is contained in the Income and Corporation Taxes Act 1988 S826.
In ITSA, the current law on late payment and repayment interest is contained in FA 2009, sections 101-103 and Schedule 53 and Schedule 54.
Interest in VAT include charges to customers (default interest) and paid to customers (repayment supplement and official error). Current law is contained in the Value Added Tax Act 1994, section 73-74 and section 78-79 respectively.
Late payment penalty
In Corporation Tax, no late payment penalties are charged, however there is some provision made for them in Finance Act 2009, Schedule 56, table items 5, 6 &13. These provisions have not been implemented.
Current law for late payment penalties in ITSA is contained in FA 2009 Schedule 56, table items 1, 12 and 17-19 and paragraphs 3 and 9-17.
For VAT there is no current standalone late payment penalty. Instead default surcharge applies at sections 59, 59 A & B of the Value Added Tax Act 1994, which is a combined sanction for late submission and late payment penalty.
Proposed revisions
Legislation will be introduced in Finance Bill 2018-19 to amend the provisions in the FA 2009 rules for interest and VAT. Finance Bill 2018-19 will introduce a new late payment penalty for Corporation Tax, ITSA and VAT. These measures will be introduced alongside a reform of late submission penalties.
Interest revisions
The government wants to revise the interest rules for VAT to ensure they follow similar rules to those for Corporation Tax and ITSA. Provisions similar to the current FA 2009 S101, S102, Schedules 53 and 54 will be enacted to apply to VAT accounting periods starting after April 20.
The measure will ensure that in VAT, late payment interest will be payable where a payment is made after the due date from the date that payment became due and payable until the date it is received by HMRC. Late payment interest will also apply to VAT returns, VAT amendments and assessments and VAT Payments on Account.
Additionally, repayment interest will be payable in VAT either from the last day the return was due to be received or the day it was received, until the date the repayment to the customer is authorised/offset. Where a VAT repayment return has been received HMRC will not pay interest:
- for periods of reasonable enquiry where a full response has been received
- for periods where HMRC needs to correct errors or omissions in the return
- where security has been requested and not provided
Late payment penalty revisions
The government wants to align the late payment penalty regimes across the main taxes (Corporation Tax, ITSA and VAT.) Current late payment sanctions will be replaced and the revised late payment penalties will apply to accounting periods (starting with VAT from April 2020). This measure will result in increased penalties within Corporation Tax, as no late payment penalty currently exists.
The new late payment penalty will consist of two separate charges. The first charge will become payable 30 days after the payment due date and will be based on a set percentage of the balance outstanding. However the precise amount of that charge will be dependent on what payments are made or the Time to Pay (TTP) arrangements that are agreed during those first 30 days.
First charge:
| Days after payment due date | Action by customer | Penalty |
|---|---|---|
| 0-15 | Payments made TTP is agreed |
No penalty is payable Penalty is suspended |
| 16-30 | Payments made TTP is agreed |
Penalty will be calculated at reduced percentage Penalty will be calculated a reduced percentage and suspended for the amounts subject of the TTP |
| Day 30 | N/A | First charge calculated based upon payment activity in the month |
Second charge:
A second charge will also become payable and will be calculated on amounts outstanding from day 31 after the payment due date until the outstanding balance is paid in full. Any TTP agreed during this period will also result in future penalties being suspended from the date the TTP was agreed.
Notice of penalty:
Both the first charge and second charge will be notified to the customer and any amounts shown as payable on the notice will be required to be paid, or appealed, within 30 days of the date of that notice.
Summary of impacts
The measure is designed to be fairer to the vast majority of taxpayers who comply with payment dates and will, in a proportionate manner, prompt better compliance for the small minority who do not comply.
Exchequer impact (£m)
| 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 | 2022 to 2023 |
|---|---|---|---|---|---|
Further work is to be carried out to determine penalty amounts. The final costing will be subject to scrutiny by the Office for Budget Responsibility, and will be set out at a future fiscal event.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
This measure impacts on all individuals who have Income Tax Self-Assessment filing obligations. Simplifying and harmonising interest and late payment penalties are expected to make the regimes clearer and simpler for customers to understand. The impact on some individuals is expected to be significant. One-off costs include familiarisation with the new regime, but HMRC will aim to reduce this cost by providing interactive guidance for individuals in their Digital Tax Account.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
HMRC does not hold equalities information on who is charged or paid interest, nor for those who receive the current late payment penalties. This measure will make the application of interest and late payment penalties fairer and simpler for taxpayers to understand. It is designed to help support customers more widely in meeting payment deadlines.
For the late payment penalty, Time to Pay arrangements and ‘reasonable excuse’ provisions will cover those unable to meet their obligations. This will protect vulnerable customers who, for example, may have suffered a bereavement or a serious illness, and who may also belong to groups with protected characteristics.
HMRC will also take account of those who are less able to engage digitally when designing the communications that we use to explain the changes to customers.
Impact on business including civil society organisations
This measure will have an impact and affect a number of businesses and civil organisations in Corporation Tax, ITSA and VAT.
Late payment penalty
This measure affects 6 million businesses and civil society organisations in CT, ITSA and VAT. The measure will have no impact on compliant businesses and civil society organisations who pay their Corporation Tax, ITSA and VAT on time. Businesses are expected to benefit from a harmonised system that is easier to understand if they do become liable to pay a penalty.
The change to the penalties regime is likely to increase the number of customers who will receive a penalty as no current penalty exists for late payment of Corporation Tax. For ITSA and VAT the number of penalties may initially increase however over time it is expected that the new regime will influence compliance and reduce the overall number of penalties
The impact on administrative burdens is expected to be significant. One-off costs include familiarisation with the new rules. On-going costs may result from businesses querying penalties and making appeals to HMRC. On-going savings are expected to result from the reduced number of penalties, which means businesses will save time and therefore costs through not having to contact HMRC querying why a penalty has been issued.
Interest harmonisation
This measure affects 2.3 million businesses and civil society organisations who are VAT registered. The changes to interest are intended to make it simpler for taxpayers to understand the interest they pay, or are paid when HMRC owes them money.
The impact on administrative burdens is expected to be significant. One off costs include familiarisation with the new interest rules. It is not expected that there will be any on-going costs as businesses will not be required to change their VAT systems or update software packages to allow for the interest revisions.
Operational impact (£m) (HMRC or other)
Funding for this measure falls within the broader Making Tax Digital (MTD) implementation costs. MTD benefits will be mainly realised through Exchequer benefits from the reduction in the tax gap and the improved and modernised experience that a fully digital HMRC will offer to business customers
The availability of MTD data is expected to create opportunities for HMRC to improve its enforcement and compliance activities. However neither the resource impacts of any changes in compliance activity to support these measures, nor the resulting impacts on compliance yield and expenditure have yet been fully quantified. Our behavioural research forecasts improved payment deadline compliance which should translate to Exchequer flow.
There is an impact on HMRC staff resources as we expect Time to Pay requests to increase as customers are incentivised to contact HMRC to arrange time to pay to avoid a penalty. However this is offset by a greater reduction in HMRC penalty collection costs.
For Corporation Tax a new penalty is being introduced so there will be an automatic operational impact with an increase to appeals and associated costs, however we will seek to minimise these costs by using automated appeals and risk based manual intervention.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be monitored through information collected from HMRC’s systems including data on the issuing of penalties, and appeals and reviews.
Further advice
If you have any questions about this change, please contact Duncan Calloway or Jackie Riley by email: mtdta@hmrc.gsi.gov.uk