A significantly tougher regime of penalties for late income tax payment was released in the Budget announcement on 3 March.
Key Points
From April 2023, full payment must be made within 15 days of the due date, unless HMRC grants a time to pay arrangement.
For VAT taxpayers, the new penalties come into play on 1 April 2022.
HM Treasury expects the reform to bring in an extra £405 million in its first four years.
From April 2023, penalties will be calculated according to the amount of tax owed and the lateness of the payment.
Full payment must be made within 15 days of the due date, unless HMRC grants a time to pay arrangement. Otherwise, a 2% penalty will be imposed if the payment is between 16 and 30 days late, with a 4% penalty for unpaid balances outstanding more than 30 days late. Daily penalties will then begin to accrue on unpaid balances.
The reform is closely linked to the imposition of the Making Tax Digital (MTD) for income tax quarterly reporting system on all individuals with annual business or property income over £10,000 starting from April 2023.
For VAT taxpayers, the new penalties come into play on 1 April 2022, although HMRC has promised an initial "light touch" approach for defaulters where the payment is less than 30 days late.
A slightly more lenient system will be introduced for late-filing of tax returns, using a penalty points method to penalise non-compliance before a penalty is charged.
A penalty of £200 for late submissions will be issued only when the relevant points threshold is reached. The points threshold depends on the taxpayer's submission frequency, and penalty points will have an expiration period up to a maximum of 24 months.
When a taxpayer has reached the relevant threshold, as determined by their submission frequency, a penalty will be charged for that failure and evert subsequent failure to make a submission on time, although their points total will not increase.
However, the MTD system for income tax requires taxpayers to make five returns each year, instead of one, including five returns for each separate business, increasing the likelihood of missing a submission deadline.