Impact assessment

Penalty Reform and Interest Harmonisation for VAT – screening equality impact assessment

Published 23 March 2023

Policy objectives

The current regimes for interest, late payment penalties, and late submission penalties are inconsistent across major taxes, meaning HMRC penalises the same behaviour in different ways.

Penalty Reform is designed to make the sanctions for failing to file or pay on time fair and effective. They incentivise compliance, building confidence in the tax system, which will protect public finances. The small minority who persistently do not comply by missing filing and payment deadlines will be penalised, with greater leniency for those who make the occasional slip-up.

Penalty Reform introduces a common approach to penalties starting with VAT. The approach will later be applied to Income Tax Self Assessment customers. When a customer misses a submission deadline, they will receive a point for each late submission. They will only receive a financial penalty when they reach the points threshold. Late payment penalties will be proportionate to the length of time a payment is outstanding. This means the earlier the outstanding tax is paid, the lower the chargeable penalties will be, which incentivises customers to improve their behaviour and avoid penalties. Additionally, VAT rules on unpaid and overpaid interest will be harmonised with those for other major taxes to ensure consistency.

Penalty Reform and Interest Harmonisation has been developed and refined with the benefit of public consultations on both the principles and design. There is a high degree of external stakeholder buy-in to the changes as a result.

Customer groups affected

All VAT-registered businesses will be impacted by the changes included in this Impact Assessment. They include:

• limited companies
• self-employed individuals
• large businesses

In addition, the changes will also affect HMRC’s stakeholders who provide services to the above customers:

• tax agents
• IT/software developers

Overall, Penalty Reform and Interest Harmonisation for VAT is expected to have benefits for all affected customers, including those in protected characteristic groups, for the reasons set out under ‘Policy objectives’ above.

What customers will need to do

What customers need to do as a result of the change

VAT-registered customers do not need to take any action under the new regimes. However, they will need to familiarise themselves with the new points-based penalty system and late payment rules. Customers who fail to submit returns or pay their VAT liabilities on time will need to understand how to be compliant to avoid further late submission points, late payment penalties, and interest charges. The penalties will be applied automatically, with details available on the customer’s Digital Tax Account (DTA).

HMRC has proactively engaged with key external stakeholders and representative bodies to communicate the changes. Customer information was published on GOV.UK on 9 May 2022. The full guidance was launched on 4 January 2023 on GOV.UK.

How customers will become aware of their penalty position

VAT-registered customers can see their real-time penalty position, take any corrective action, and appeal against any penalty, using their DTA. HMRC will send all VAT-registered customers a notification letter by post, to the principal place of business address, when a penalty point or a penalty is raised on their account. HMRC will encourage customers to access their information and pay through their DTA.

Customers who have been granted an exemption from Making Tax Digital (MTD) for VAT can continue to submit telephone or paper returns. The current VAT100 return form, which customers use if they submit telephone or paper returns, provides contact information for customers seeking additional assistance.

When customers need to do this

There is no change to the date by which a VAT-registered customer must file their return (one month and 7 days after the end of their VAT accounting period).

VAT-registered customers must pay their VAT liabilities by the due date. Late payment interest will begin to accrue on any late payments. A first late payment penalty charge will become payable 16 to 30 days after the payment due date. A second charge will become payable from day 31 after the payment due date and will accrue daily based on outstanding amounts.

Customers will be notified of both the first charge and second charge, and any amounts shown as payable on the notice will need to be paid or appealed within 30 days of the date of that notice.

If customers arrange a Time to Pay with HMRC, and their request is approved, the penalty will stop accruing from the proposed date. The charge amount will be based on payments made or any Time to Pay arrangements agreed to during the first 30 days after the payment due date.

Customers will have a right to appeal against a submission point or late payment penalty. A customer will not incur a submission point or late payment penalty if they had a reasonable excuse for not making the payment on time.

Period of familiarisation

HMRC will not be charging a first late payment penalty for the first year, from 1 January 2023 until 31 December 2023, if customers pay in full within 30 days of the payment due date. This will give customers time to get used to the changes.

Assessing the impact

HMRC has assessed the impact on those in protected characteristic groups, in line with the Equality Act and Public Sector Equality Duty, and Section 75 of the Northern Ireland Act:

• racial groups
• sex
• gender reassignment
• sexual orientation
• pregnancy and maternity
• marriage and civil partnership
• political opinion (for Northern Ireland only)

There is no evidence to suggest any specific impacts on those customers within any of the protected characteristic groups (listed above).

HMRC has set out its assessment of the impact on other protected characteristic groups below.

The majority of VAT-registered businesses affected by Penalty Reform and Interest Harmonisation for VAT are also now in MTD for VAT. A separate Equalities Impact Assessment for MTD for VAT is available.

Where it is not reasonably practical for a customer within one or more of the protected characteristic groups to use MTD services, they may be exempt from MTD requirements.

Disabled

Impact on customers

There may be specific impacts on customers within this protected characteristic group.

Proposed mitigation

Digital content can be provided in a variety of accessible formats, including hard copy, on request. Formats available include Braille, Audio, and Large Print. There is also a zoom facility to increase and reduce font sizes within online content.

Government Digital Service (GDS) assesses and signs-off aspects of HMRC’s digital design to ensure that it meets accessibility requirements, such as for the use of screen reader users.

HMRC will continue to advise digitally excluded VAT customers and MTD exempt VAT customers to file returns using their current non-digital method, and to access support through the same contact channels as before.

HMRC offers an Extra Support Service (ESS) to customers who are unable to interact with HMRC digitally or need additional support and reassurance. Customers can use an alternative postal address if they rely on an agent, or other trusted helpers, to meet their VAT obligations.

Age

Impact on customers

Customer insight suggests some potential differences in digital confidence and capability among customers in different age groups.

Customers with occupational or state pensions were found to have a typical age of 76 and have significantly less digital capability compared to other age groups. This customer group was more likely than other age groups to contact HMRC by telephone.

There was some evidence to show that older customers, with limited digital capability, were relying more on agents to help them meet their VAT obligations.

Proposed mitigation

HMRC will continue to advise digitally excluded VAT customers and MTD exempt VAT customers to file returns using their current non-digital method, and to access support through the same contact channels as before.

HMRC offers an ESS for customers who are unable to interact with HMRC digitally or need additional support and reassurance. Customers can use an alternative postal address if they rely on an agent, or other trusted helpers, to meet their VAT obligations.

Religion or belief

Impact on customers

Some religions have rules and guidelines that affect how their followers use computers and digital services.

Proposed mitigation

Individuals in this group will be able to access tax information and services when it is convenient for them through HMRC’s 24/7 digital service, the DTA. This will allow individuals to utilise our services outside of traditional business hours to suit their needs. If customers are unable to use HMRC’s digital services, they can choose to use alternative channels for assistance, such as post or telephone.

People with dependents (carers)

Impact on customers

Although this customer group may not be directly affected, secure digital access is necessary for carers.

Proposed mitigation

HMRC offers a ‘Trusted Helper’ service to anyone who needs to access our services. Customers can appoint an agent and certain individuals can access services on behalf of others where they have Power of Attorney.

The DTA provides self-service options outside of traditional business hours to suit the needs of individuals in this group.

People who use different languages (including Welsh Language and British Sign Language)

Impact on customers

Some VAT-registered businesses are based outside the UK and special VAT rules apply to them. Overseas businesses that wish to operate using Amazon and Ebay, for example, must have a VAT registration to use these platforms. There is anecdotal evidence that English may be a second language for many of these overseas customers.

Proposed mitigation

HMRC provides a variety of translation and language services, which are available to both our staff and customers, including use of ‘the big word’ language service and the Welsh Language Unit.

Penalty Reform pages on the DTA are available in the Welsh language. All customer letters, including statutory notifications, will be available in the Welsh language from the first application of penalties after go-live on 1 January 2023.

Additionally, on ‘Find software for MTD for VAT’ there are 25 easily identifiable products to support customers with hearing and communication needs, and 2 MTD for VAT software products that support the Welsh language.

Opportunities to promote equalities

We have considered opportunities to promote equalities and good relations between people in each of the protected characteristic groups and those outside of that group.

None have been identified.

A full equality impact assessment is not recommended.