Late payment penalty regime to change for taxpayers

HMRC has published a policy paper outlining the forthcoming changes to the penalties for late payment and interest harmonisation for taxpayers.

The government intends to reform sanctions for late submission and late payments. This is to make them ‘fairer and more consistent across taxes‘. Initially the changes will apply to VAT and Income Tax Self Assessment (ITSA).  

What is Interest Harmonisation?

HMRC charges late payment interest as a form of recompense for the use of money that is owed. Similarly, where amounts have been overpaid, HMRC pays interest on that overpayment.

Interest Harmonisation provides a set of rules that ensures interest is automatically charged and paid in all cases where amounts are paid late or where amounts have been overpaid. The aim is to bring VAT in line with other tax regimes, including ITSA.

Why are the changes being introduced?

Under the new regime, there are two late payment penalties that may apply. A first penalty and then an additional or second penalty, with an annualised penalty rate. All taxpayers, regardless of the tax regime, have a legal obligation to pay their tax by the due date for that tax.

The taxpayer will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. If tax remains unpaid after day 15, the taxpayer incurs the first penalty. This penalty is set at 2% of the tax outstanding after day 15.

If any of the tax is still unpaid after day 30 the penalty will be calculated at 2% of the tax outstanding after day 15 plus 2% of the tax outstanding after day 30.

If tax remains unpaid on day 31 the taxpayer will begin to incur an additional penalty on the tax remaining outstanding. This will accrue at 4% per annum.

Time to pay arrangements

HMRC will offer taxpayers the option of requesting a Time To Pay arrangement. This will enable a taxpayer to stop a penalty from accruing by approaching HMRC. A schedule can then be agreed to pay their outstanding tax.

Time-to-Pay arrangements (source

When will the changes take place?

For VAT taxpayers, the reforms take effect from VAT periods starting on or after 1 April 2022. The changes will take effect for taxpayers in ITSA from accounting periods beginning on or after 6 April 2023 for those with business or property income over £10,000 per year (taxpayers who are required to submit digital quarterly updates through Making Tax Digital for ITSA).

For all other ITSA taxpayers, the reforms will take effect from accounting periods beginning on or after 6 April 2024.

Full details of the changes can be found via the website.

If you have any concerns about these changes, please get in touch with a member of our tax team on 01903 234094.