HMRC is reforming its mechanism for penalising late payment of taxes. Reforms will initially apply to late payment of VAT and Income Tax Self-Assessment.
The revised Late Payment Penalties system will replace the Default Surcharge penalty for VAT noncompliance.
The changes will apply to VAT taxpayers for the accounting periods beginning on or after 1 April 2022.
Two penalties for VAT late payment
HMRC’s new system for late payment of VAT will take the form of two penalties.
The taxpayer will not incur a penalty if they pay the tax owed within 15 days after the due date. If tax is still not paid after 15 days, the taxpayer incurs a first penalty. HMRC sets the penalty at 2% of tax outstanding. If the taxpayer does not pay the amount is after day 30, the penalty will increase to 4% of tax outstanding.
The second penalty
If tax remains unpaid on day 31, HMRC will apply an additional penalty. The penalty subsequently accrues daily at a rate of 4% per annum.
Preventing the penalty accruing
The taxpayer can request a Time-To-Pay (TTP) arrangement. According to the arrangement, HMRC and the taxpayer will agree on a date to pay the outstanding tax. The penalty will at that point cease from accruing further.
HMRC promises a level playing field for late VAT payments
According to HMRC, the revised penalty system is designed to be “fairer and more consistent”.
HMRC accordingly has discretionary power not to charge a penalty for late payment, or to reduce the penalty.
Notably, “If HMRC is satisfied a taxpayer has a reasonable excuse HMRC will agree not to assess. This will prevent the taxpayer from unnecessarily having to appeal.”
HMRC says the penalty system also aims to create a fairer tax regime by preventing those who do not pay their tax on time from gaining an unfair financial advantage over those that do.
Prevention is better than cure
HMRC’s proposed penalties for late VAT payments promise to be consistent and predictable. That is surely welcome. However, under the revised penalty system, businesses could still face potentially severe charges if they fail to meet their VAT obligations within a reasonable time period.
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