Understanding the new HMRC late submission penalty scheme for VAT and ITSA payments

Sharon McDougall of Scotland Debt Solutions explains the new HMRC penalty points system for late submission of VAT and Income Tax Self Assessment (ITSA).

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What is the HMRC penalty points system for VAT and ITSA payments?

Effective for VAT return periods starting from January 2023, HMRC have implemented a new late submission penalty scheme to replace the default surcharge model. This updated penalty scheme aims to be more lenient towards those that miss the occasional deadline, while still penalising those who repeatedly fail to comply with their HMRC obligations.

Under the new scheme, individuals will no longer receive an immediate financial penalty for late submission of VAT and Income Tax Self Assessment (ITSA). Instead, a points-based scheme has been introduced; each instance of late or non-compliance will result in a penalty point being issued. Once a certain threshold is reached, a £200 fine will be levied upon the individual, with subsequent £200 fines issued for each missed deadline from that point onwards.

Penalty thresholds

The penalty thresholds will be determined by the regularity a taxpayer is required to submit a return; those with monthly submissions will have a higher threshold than those who submit annually. The current thresholds are as follows:

  • Annual submissions – 2 penalty points
  • Quarterly submissions – 4 penalty points
  • Monthly submissions – 5 penalty points

The threshold level will be set according to the submission frequency as per the start of the returns period. However, this does not prevent a taxpayer from changing how often they are required to file their returns. For example, if a business opts change their VAT returns filing frequency – or is forced to by HMRC – from quarterly to monthly, their penalty points threshold will be increased by one point to account for this change.

Anomalies and exceptions to the rule

For those individuals who have to provide an annual ITSA return as well as VAT returns, they will have two separate points totals, one for each submission they are required to make. In practice, this means an individual late for submitting their annual ITSA return and quarterly VAT return will be given a penalty point for each. s long as this was their first missed deadline these two points would not take them to the threshold as they would be split across each obligation.

Further dispensation is given when it comes to missing several submission deadlines over the course of the same month. In order to give the taxpayer the opportunity to get their affairs straight, only one penalty point per obligation will be given in a one month period. It should be noted here that those who have different MTD for ITSA submission obligations are an exception to this one point per month rule.

HMRC does have the discretion not to award a penalty point (or issue a fine if the threshold has been met), however this is very much the exception rather than the rule. Taxpayers also have the ability to challenge the issuing of a penalty point although before doing this they must believe they can demonstrate a valid reason why they were late in completing their filing obligations.

Expiration of penalty points

As long as the taxpayer has not reached their threshold, penalty points will automatically expire two years after they were first issued. If the threshold has been reached, however, a ‘period of compliance’ has to be served before the penalty points can be removed from their balance.

Just like the calculation of an individual's threshold, the period of compliance which must be demonstrated will depend on how frequently they are required to submit their returns.

  • Annual submissions – 24-month period of compliance
  • Quarterly submissions – 12-month period of compliance
  • Monthly submissions – 6-month period of compliance

During the period of compliance, all submissions due during this time must be filed on time. Additionally, the taxpayer must also ensure that all outstanding submissions for the preceding 24 months have been filed correctly. It is only once both of these conditions have been met that the points tally will be reset to zero.

About the author

Sharon McDougall of Scotland Debt Solutions, part of Begbies Traynor Group, is a DAS-approved Money Adviser with vast experience in providing debt advisory support to individuals in Scotland.

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Penalties for late submission (GOV.UK)


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Publication date

5 October 2023

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.