It’s part and parcel of the UK tax system that each year changes occur to tax law, whether that involves a new piece of legislation coming into effect or changes to an existing regime.

It should come as little surprise, therefore, that Finance Bill 2018/19 has its own set of changes in store, not least when it comes to the shake-up of how late filing penalties are assessed and applied.

New penalty regime proposed for VAT and income tax

The draft Finance Bill 2018/19 was initially released in July 2018. Within that draft, a new penalty regime was proposed in respect of late return submissions under the VAT and income tax self-assessment (ITSA) regimes.

The new regime will introduce a points-based penalty system relating to “regular submission obligations” that are filed late. Once implemented, the new penalty regime will replace the existing penalty regime in respect of that tax. Importantly, the new regime will not apply to occasional submission obligations, which will be covered by existing penalty regimes.

Under the new regime, a taxpayer will receive a penalty point every time they file a return late to HMRC. Once a taxpayer reaches a certain points threshold they will face a financial penalty. The level of the threshold itself will be dependent on how frequently that particular type of return has to be filed. The current proposed thresholds can be seen within the “Technical note on late submission penalties.”

Once a taxpayer has passed the points threshold, they will not receive any additional points, but they will be subject to an additional penalty for each subsequent late return.

Points are expected to have a lifetime of two years, although they will not expire where a taxpayer is at a penalty threshold. In such cases, a period of “good compliance” will be required before the points are reset to zero.

Why is a new penalty regime being introduced? 

Although HMRC estimates that the changes to late filing penalties will impact “5.7 million businesses and civil society organisations in the ITSA and VAT regimes” in reality the changes have been put in place to penalise “only the small minority who persistently fall foul of the rules.”

Despite this, some filers will face noticeable differences in how penalties are applied if they occasionally submit their returns late.

For example, when it comes to VAT, HMRC expects that the number of businesses within the VAT regime that receive late payment penalties should increase. This is because, currently, the Default Surcharge does not issue a penalty based solely on late submission. On the other hand, late filers under the ITSA regime are expected to receive fewer penalties as an initial late filing penalty will no longer be charged.

When will these changes come into effect? 

Finance Bill 2018/19 (also known as Finance (No. 3) Bill 2017-19) was published in full on 6 November 2018. Ultimately, it is expected to become Finance Act 2019, which should be enacted in March 2019.

After that point, the implementation of the new penalty regime is not expected until 1 April 2020, and even then, it is only expected to be applied in respect of VAT filing obligations arising from that date. A timetable in respect of when the ITSA penalty regime will be introduced will be released “in due course.”

In light of the upcoming introduction of the Making Tax Digital for VAT regime, which will be mandated from 1 April 2019, it’s likely that many firms and clients will be thankful that the changes to late return penalties are not imminent.

Equally, an April 2020 rollout means that there is still plenty of time for firms to read through and understand the finer points of the new penalty regime, and, crucially, let clients know as soon as possible about the upcoming changes, particularly if they have been known to file late in the past.

It is also worthwhile spending some time with your clients now to discuss the new penalty regime so that they understand how both the existing and new penalty regimes will apply under Making Tax Digital for VAT.

Conclusion

Although clients might not be too happy to hear that changes to late return penalties are on the way, especially given the impending changes to how VAT returns and records and digitally filed and stored under Making Tax Digital for VAT, there is still enough time to forewarn clients about the new penalty regime and let them know how they can best prepare. For more information on how Making Tax Digital for VAT and the new and existing penalty regimes for VAT will interact with each other, speak to a