UK proposes new penalty and interest regime for late tax return submissions and payments

Out-Law Legal Update | 14 Dec 2017 | 2:50 pm | 5 min. read

LEGAL UPDATE: The UK government intends to introduce a driving offence style points-based regime for late submission of income tax, corporation tax and VAT returns. Penalties would not be incurred until a threshold number of points had been reached. Points could be reset to zero after a sustained period of good compliance and penalty points would generally expire after 24 months if the penalty threshold had not been met. In addition, the government is proposing harmonising the late payment interest and repayment interest rules for VAT, income tax and corporation tax.It proposes replacing the VAT default surcharge regime with late payment interest and introducing a new regime for penalty interest for income tax, corporation tax and VAT.

The government is proposing changes to the penalty and interest regime for late submission of returns to HMRC and late payment of tax. This is to tie in with the introduction of its 'making tax digital' initiative for smaller businesses, including landlords and the self employed. Making tax digital will require businesses to keep electronic records of their accounts and file their tax information digitally, on a quarterly basis. It will be introduced first in 2020 for VAT for businesses above the VAT threshold. Large businesses are likely to be excluded from MTD, but will still potentially be affected by the penalty and interest changes.

Late submission penalties

The government intends to introduce a points-based regime for late submission of income tax, corporation tax and VAT returns.

Under the current system, taxpayers incur an automatic penalty of £100 if they submit an income tax or corporation tax return late, even if it is only a day late. Further penalties are payable if the return is more than 3 months late.

For VAT, a default surcharge regime applies where a return has not been made on time or the VAT has not been paid on time. No penalty is payable as a result of the first default but HMRC serves a default surcharge liability notice on the taxpayer. The taxpayer is liable to a default surcharge if he defaults again within the year following the first default. The level of the surcharge depends upon the number of times he has defaulted in the surcharge period.

The proposed points-based regime for late submission of returns will operate as follows:

  • each time a taxpayer fails to submit a return on time he will incur a penalty point
  • once a penalty threshold is met, a financial penalty is incurred for every subsequent failure to submit a return on time
  • the penalty threshold will be 2 for annual submissions; 4 for quarterly submissions; and 5 for monthly submissions
  • penalty points will be applied per tax so that a point for late VAT submission would not be added to a point for late corporation tax submission
  • points can be reset to zero by a sustained period of good compliance, which would be meeting deadlines for 2 years if the submission is annual; a year if the submission is quarterly; and 6 months if the submission is monthly
  • it will only be possible to reset the points if all relevant submissions for the tax for the previous 24 months have been provided to HMRC
  • penalty points would generally expire after 24 months if the penalty threshold has not already been met
  • penalty points will not arise if the taxpayer has a reasonable excuse and points and penalties will be fully appealable
  • the penalty for deliberately withholding information will be amended so that it starts any time after a deadline has passed, rather than the current 12 months after a deadline has passed

The government has not yet announced how much the financial penalty will be. It intends to consult on the detail of the regime in summer 2018.

The regime will be implemented at different times for different taxes. However, the implementation dates will tie in with the introduction of making tax digital. It is intended that the new regime will be introduced first for making tax digital VAT obligations in 2020.

Late payment interest and penalties

The government is consulting on whether to harmonise the late payment interest and repayment interest rules for VAT, income tax and corporation tax.

Where tax is not paid on time late payment interest is charged. Late payment penalties may also be charged where a taxpayer pays late and does not have a reasonable excuse.

In general the rates of interest charged and paid to taxpayers are consistent across most taxes; set at a rate of 2.5% above base rate for interest charged to taxpayers and at 1% below base rate, subject to a minimum of 0.5%, for interest paid to taxpayers.

Different rates of interest are paid and charged in respect of corporation tax quarterly instalment payments to reflect the fact that these are estimates of profit for the current year.

In addition to interest, late payment of income tax currently attracts a penalty calculated as a percentage of the tax outstanding. If the tax is unpaid 30 days after the due date, the penalty is 5% of the outstanding tax. If it is still unpaid 6 months after the due date, a further 5% penalty arises and if the tax is unpaid 12 months after the date another 5% penalty arises. Interest also accrues from the date on which the tax payment was due until the date on which the payment is made.

There are no late payment penalties for corporation tax.

The rules for late payment of VAT are quite different because of the default surcharge regime. The default surcharge is a charge of between 2% and 15% of the tax due, with the amount depending upon the number of defaults, rather than how long a payment is outstanding. If a repayment of VAT is not made within 30 days, HMRC is currently obliged to pay a repayment supplement of 5% of the tax due.

On late payment interest the government is proposing:

  • to replace the VAT default surcharge regime with late payment interest from the due date until the amount is paid
  • leave the current corporation tax rules for late paid interest on the basis that they are sufficiently harmonised with the regime for income tax and to leave the different interest rates for quarterly instalment payments
  • to pay repayment interest, except for any period where HMRC has made reasonable enquiries and a full and complete response has not been obtained.

The government is proposing to introduce a new regime for penalty interest for income tax, corporation tax and VAT. Under this new regime it is proposed that:

  • no penalty will be payable if payment is made (or a time to pay arrangement is agreed with HMRC) within 15 days of the due date
  • a penalty of 2.5% of the outstanding tax is payable if payment is made (or a time to pay arrangement is agreed with HMRC) on days 16–30 after the due date
  • a penalty of 5% of the outstanding tax is payable if the tax remains unpaid 30 days after the due date and penalty interest is charged from the 30 days until full payment is made.

The penalties will be subject to a defence of reasonable excuse. The rate of penalty interest has not yet been announced, but the consultation confirms that it will not have the Bank of England base rate added to it. Penalty interest would be payable in addition to late payment interest

 Taking an example, if £3000 of tax was outstanding for 60 days after the due date:

  • A penalty of 5% of the outstanding tax (£150) would be charged 30 days after the due date
  • Penalty interest would run from 30 days after the due date until payment of the tax 60 days after the due date (ie for 30 days)
  • Late payment interest would run from the due date until 60 days after the due date (ie for 60 days).

Implications

The late submission changes are designed to be fairer, distinguishing, for example between those who have had an occasional lapse in their filing obligations and those who regularly fail to comply with their obligations.

Bringing VAT penalties for late submission onto the same basis as corporation tax and income tax should simplify the system, so that it is easier for taxpayers to understand and can therefore act as an inventive to file and pay tax on time. There will, however, be concerns that for smaller businesses the new system will be introduced too soon after the introduction of making tax digital.

Late payment of corporation tax currently only attracts interest so the changes will result in the introduction of a tax based late payment penalty in additional to that interest.