Policy paper

Late submission penalties

Published 6 July 2018

Who is likely to be affected

These changes will affect taxpayers who submit returns late. Agents, and others acting on behalf of taxpayers, will also be affected because they will need to understand the new rules.

Implementation will initially only be for Income Tax Self Assessment (ITSA) and VAT. Whilst the Excise, Environmental, Insurance and Transport Taxes are included within the scope of the legislation changes for these taxes will be implemented at a later date.

Corporation Tax is not included in the scope of the legislation. It is the government’s ambition to apply the new approach to Corporation Tax in the future.

General description of the measure

Taxpayers are required to submit tax returns by specified dates. When taxpayers submit their returns late they generally incur a penalty. This measure introduces a new points-based penalty regime for regular submission obligations (for example, return filing obligations), which replaces existing penalties for the taxes in scope.

Returns have to be submitted more frequently for some tax regimes and circumstances than others. Depending on the frequency of the return submission obligation, a defined number of penalty points will accrue to a threshold. Once this threshold has been reached, a fixed penalty will be charged to the taxpayer.

After this each late submission will attract a fixed penalty, until the taxpayer meets all of their submission obligations by the relevant deadline for a set period of time. Once this happens, and a customer has provided any outstanding submissions for the preceding 24 months, the points total will reset to zero.

Points will 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. Taxpayers will have a separate points total per submission obligation.

Penalty points and thresholds will not cross tax regimes. For example, if a taxpayer has both Income Tax Self-Assessment and VAT submission obligations, they will have a points threshold for each regime and any points will accrue independently.

This measure will reduce the number of ITSA penalties issued, as a monetary penalty will not be charged from the start. The fixed penalty is likely to be set at a higher rate than current penalties to reflect this, but unlike the current penalty regime there will be no escalation to daily or tax-geared penalties.

HMRC expects to publish an updated tax information and impact note when final details, including the value of the penalty, are announced. This measure will be introduced alongside the related interest harmonisation and sanctions for late payment regime as a package.

Policy objective

The government wishes to encourage compliance with regular return submission obligations but does not want to punish taxpayers who make occasional mistakes. This measure is designed to be proportionate, penalising only the small minority who persistently fall foul of the rules.

Consistent compliance will be encouraged by the opportunity to clear penalty points without incurring a penalty charge. The new regime is designed to be applicable to as many taxes with regular filing obligations as possible to provide a clear, transparent and consistent approach for taxpayers and HMRC.

Background to the measure

This new measure reflects the reasonable expectations of the compliant majority that an occasional failure in the context of overall good compliance, should not be treated the same as persistent failures and long-term poor behaviour.

This measure has been developed through three separate consultations. The first consultation entitled ‘HMRC penalties: a discussion document’ ran from 2 February to 11 May 2015, leading to the 2016 consultation ‘Making Tax Digital: Tax Administration’ which ran from 15 August to 7 November 2016 and the latest consultation ‘Making Tax Digital - sanctions for late submission and late payment’ which ran from 20 March to 11 June 2017. The latter consultation proposed three different penalty models, resulting in the majority of respondents favouring the points based model above the others.

The summary of responses to this consultation was published on 1 December 2017 and at the same time the government announced it would be taking forward the points based model. Responses to all of these consultations have helped to shape the details of the new penalty regime.

Draft legislation was published for consultation on 6 July 2018.

Detailed proposal

Operative date

The intention is to stage implementation of the points based model commencing with VAT filing obligations from 1 April 2020. A timetable for implementation for ITSA filing obligations will be announced in due course. There are no immediate plans to implement for the Excise, Environmental, Insurance and Transport Taxes but the government intends to extend the regime to them in future following implementation for VAT and ITSA.

Current law

For VAT, there is no current late submission penalty sanction. Instead, the Default Surcharge is provided for at sections 59, 59A and 59B of the Value Added Tax Act 1994. Default Surcharge is a combined late return and late submission sanction. Default Surcharge is currently being reviewed and the related interest harmonisation and sanctions for late payment is being designed to replace it.

Current ITSA late submission penalties are at section 106 and Schedule 55 to Finance Act (FA) 2009.

Proposed revisions

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. The second schedule will make minor updates to the deliberate withholding penalty (currently set out from paragraph 6 of Schedule 55 to FA 2009) so it works effectively with the new points-based regime.

Occasional obligations will continue to be dealt with under existing legislation. At first, implementation will only be for VAT and ITSA although regular obligations for the Excise, Environmental, Insurance and Transport taxes will be included in the scope of the legislation for future implementation.

Summary of impacts

Exchequer impact (£m)

2018 to 2019	2019 to 2020	2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024

The Exchequer impact will depend on the value of the monetary penalty and so will be confirmed when the value is confirmed in due course. 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 individuals who have ITSA or VAT submission obligations. The impact on 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

Whilst HMRC does not hold equalities information on those who receive current late submission penalties, this measure is designed to help support taxpayers more widely in meeting deadlines. Furthermore, ‘reasonable excuse’ review and appeal provisions will cover those unable to meet their obligations. This will protect vulnerable customers, who have, for example, suffered a bereavement or serious illness, 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 we use to explain the points-based system.

Impact on business including civil society organisations

This measure is expected to affect 5.7 million businesses and civil society organisations in the ITSA and VAT regimes. There will be no impact on compliant businesses and civil society organisations who submit their returns on time.

The change to the penalties regime is likely to increase the number of VAT taxpayers who will receive a penalty for a late submission. This is because the Default Surcharge does not penalise late submission alone. For businesses within ITSA, the number of penalties issued is expected to reduce as a monetary penalty will not be charged from the start.

The changes are expected to have a significant one-off impact on businesses administrative burdens. One-off costs include familiarisation with the new regime but HMRC will aim to reduce this cost by providing interactive guidance in taxpayer Digital Tax Accounts. On-going savings for some are expected to result from the reduced number of penalties, which means businesses will save time by not having to contact HMRC querying why a penalty has been issued. However whilst we are reducing the large numbers of penalties for taxpayers, they will still need to monitor their points total.

Operational impact (£m) (HMRC or other)

Funding for this measure falls within the broader Making Tax Digital implementation costs. Making Tax Digital 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 taxpayers.

The new late submission penalty regime will provide new appeal rights which will create a potential operational impact but we will seek to minimise these costs by using automated appeals and risk based manual intervention.

The availability of Making Tax Digital 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.

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 points, and appeals and reviews.

Further advice

If you have any questions about this change, contact Olly Toop or Jackie Riley by email to: mtdta@hmrc.gsi.gov.uk.