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This publication is available at https://www.gov.uk/government/publications/technical-note-on-capital-gains-tax-and-corporation-tax-for-non-residents-on-uk-property/technical-note-on-capital-gains-tax-and-corporation-tax-for-non-residents-on-uk-property
The government wishes to encourage compliance with regular return submission obligations but does not want to punish taxpayers who make occasional mistakes. This new points-based late submission penalty regime 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.
This technical note accompanies the draft legislation and explanatory note for the new penalty regime, and provides an explanation of how HMRC expects it to work. This note should be read by taxpayers (and those that represent them), who fall within Income Tax Self Assessment (ITSA) and VAT.
Those who also fall within other excise, environmental, indirect and transport taxes may also be interested as the government intends to introduce the regime more widely after ITSA and VAT. The government expects to publish an update to this technical note and/or further guidance following technical consultation on draft legislation.
This measure is expected to be introduced alongside the related interest harmonisation and sanctions for late payment regime as a package.
Scope of new regime
The new points-based penalty regime will only apply to returns (including Making Tax Digital regular updates) with a regular filing frequency, for example monthly, quarterly or annually. It will not apply to occasional returns (for example a return required for a one-off transaction), which will continue to be covered by current penalty regime for the relevant return.
Minor changes to the ‘behavioural’ deliberate withholding penalty (currently contained in the same Schedule 55 as the non-deliberate penalty) are also needed to ensure the 2 penalties work together.
The new regime is likely to initially apply to regular VAT and ITSA obligations. Other excise, environmental, indirect and transport taxes are included within the scope of legislation since the government intends to introduce the new regime more widely after VAT and ITSA. The government intends to bring Corporation Tax within the scope of the regime at a later date.
Overview of how the new late submission penalties work
A taxpayer will automatically receive a point every time they fail to make a return on time. HMRC will notify them of this point. At a certain threshold of points, a financial penalty will be charged and notified (value to be confirmed in due course).
The level of the points threshold will depend on how often a taxpayer is required to file a return, to recognise the demands of more frequent obligations. Once a taxpayer has reached the threshold a penalty will be charged for every subsequent failure to make a return on time but their points total will not increase.
As previously set out on consultation, the government expects to introduce the new regime with the following thresholds, although it will have the power to change them through secondary legislation:
|Submission frequency||Penalty threshold|
|Quarterly (including Making Tax Digital)||4 points|
More than one failure in a month
If a taxpayer makes 2 or more failures relating to the same filing obligation in the same month, they will only incur a single point for that month. This is to prevent a taxpayer reaching the points threshold too rapidly to be able take corrective action.
Expiry of points over time
To prevent long-distant historic failures combining with occasional recent failures to cause a financial penalty, points will have a lifetime after which they expire. The government expects to introduce the regime with a points lifetime of 2 years, calculated from the month after the month in which the failure occurred.
Points will not expire when a taxpayer is at the penalty threshold in order to ensure they must achieve a period of good compliance to reset their points (see Expiry of points for good compliance below).
Expiry of points for good compliance
Any points accrued will be reset to zero after a period of good compliance (that is, filing returns on time), and the additional criterion that they have submitted all the returns which were due within the preceding 24 months. This will be regardless of whether or not these returns were initially late. Both criteria must be met at the same time to reset points.
If a taxpayer is at the penalty threshold, has achieved the period of good compliance but has not provided outstanding returns, they will continue to be charged penalties for further failures to file on time.
As previously set out on consultation, the government expects to introduce the new regime with following periods of good compliance, although it will have the power to change them (and the period for which outstanding returns are required) through secondary legislation:
|Submission frequency||Period of good compliance|
|Quarterly (including Making Tax Digital)||4 submissions|
Separate points totals
Taxpayers will normally have one points total for each frequency of return they are required to file. So if they are required to provide an annual ITSA return and quarterly VAT returns and both returns are late, they will incur 2 points applying to 2 different totals: one for ITSA and one for VAT.
Where a taxpayer has 2 or more businesses and files separate returns for each business each business will have a separate points total. If a taxpayer provides a single return for multiple businesses they will have a single points total.
There will be time limits for HMRC to notify a taxpayer of a point, after which the point cannot be incurred. The government expects to introduce the regime with the following time limits, calculated from the month after the month in which the failure occurred:
|Submission frequency||Time limit for notifying a point|
|Quarterly (including Making Tax Digital)||3 months|
There will also be a time limit for HMRC to assess a financial penalty. The government expects to introduce the regime with a time limit of 2 years after the last failure that led to the penalty.
Reviews and appeals
A taxpayer will be able to challenge a point or penalty through both an internal HMRC review process and an appeal to the First Tier Tribunal. This will include on the grounds that the taxpayer had a reasonable excuse for missing a submission deadline, where they must show HMRC (or on appeal, the Tribunal) that they had a reasonable excuse.
HMRC anticipates the reviews and appeals process will be available online through the digital tax account, as it is currently for ITSA. Points and penalties will continue to apply until such time as the review or appeal outcome is determined.
Where HMRC may not apply a point or penalty
HMRC’s policy intention is to award a point (and therefore potentially a penalty) if a taxpayer fails to meet a submission deadline. A taxpayer will be able to use the reviews and appeals process (described above) to challenge the point or penalty, including if they think they have a ‘reasonable excuse’.
HMRC may use its discretionary powers in the law not to award a point or charge a penalty in relation to an individual customer or group of customers if they consider it appropriate to do so in the particular circumstances. These will normally be where HMRC has determined that the taxpayer has a reasonable excuse in advance of receiving taxpayer representations. This will prevent a taxpayer from unnecessarily having to follow the review or appeal process.
These circumstances may include but are not limited to:
- external issues relating to third party accounting software used to provide Making Tax Digital for Business submissions
- where a taxpayer is reasonably in dispute with their software provider
- issues with HMRC’s own systems that prevent taxpayers making a submission
- where HMRC wishes to provide a period of easement where taxpayer submission obligations are changing (see also familiarisation period below)
However, where in future HMRC has decided to award a point or penalty, taxpayers must use the reviews and appeals process to challenge this decision.
Where in future HMRC introduces new or amended return obligations for taxpayers, HMRC will have the power to make secondary legislation to provide for a period of grace during which they will not incur a point or financial penalty for a late return.
This will not be the case for minor changes to obligations nor where the new penalty regime is being introduced for taxes where obligations have not changed. This familiarisation period will not apply to deliberate failures to file.
Changing frequency of reporting
In many taxes (including VAT), it is possible for taxpayers to elect to change submission frequency if they meet certain conditions. For example, in VAT, monthly, quarterly and annual return frequencies are available.
To avoid inadvertently penalising those who need to change their filing frequency (or conversely incentivising changes unrelated to business needs), the following mechanism will adjust the taxpayer’s points total according to the change they are making. The only exception will be if a taxpayer has zero points for the old frequency of submissions in which case they will remain on zero points for the new frequency of submission.
|Change in reporting frequency||Adjustment to points|
|Annual to quarterly||+2 points|
|Annual to monthly||+3 points|
|Quarterly to annual||-2 points|
|Quarterly to monthly||+1 point|
|Monthly to annual||-3 points|
|Monthly to quarterly||-1 point|
A taxpayer cannot have a negative number of points (in other words points credits) so if the adjustment would lead to a negative number, the taxpayer will be treated as having zero points.
Where a taxpayer has points deducted from their total it is the most recent points that will remain (and therefore relevant time limits will be calculated from).
Where a taxpayer has points added to their total, they will be treated as having been incurred at the same time as the most recent existing point.
If a taxpayer with multiple businesses, some of which are covered by a single return, changes reporting frequency and also changes which businesses are covered by a single return, their total will not be adjusted. Instead any historic points will immediately expire.
Non-standard accounting periods
In some taxes (including VAT) it is possible for taxpayers to request the facility to provide returns for non-standard accounting periods. Some of these are only transitional periods and will be excluded from submission obligations considered as part of the new points-based penalty regime. For example, these transitional periods include those at the beginning or end of a period VAT liability, or where a taxpayer wants to change quarterly stagger.
The exception for transitional periods will not apply to deliberate failures to file. However, in exceptional circumstances some non-standard accounting periods are granted for regular submissions.
To avoid incentivising requests for these non-standard accounting periods, for the purposes of points and penalties they will be treated as the next longest standard accounting period. For example, a period of 3 weeks will be treated as a monthly obligation, a period of 6 weeks will be treated as a quarterly obligation and a period of 5 months will be treated as an annual obligation.