Future changes to tax penalties and payment dates
Apr 08, 2021
The recent Budget Day announcements and Tax Day consultations have highlighted two tax changes on the cards – one to the penalties levied against the late payment of taxes, and the other to the payment schedule for self assessment income tax and corporation tax.
Tougher penalties for late payment of VAT and income tax
In the Budget on 3 March, the Chancellor Rishi Sunak confirmed that starting in April 2022 a tougher regime of fines will be introduced for the late payment of VAT, and then later on, income tax.
Penalties will be calculated according to the amount owed and the lateness of the payment. Unless HMRC has granted a time to pay arrangement, then full payment of the tax owed must be made within 15 days of the due date. If it’s not, a 2% penalty will be imposed between 16 and 30 days after the deadline. Beyond 30 days this penalty increases to 4% of the unpaid balance. Daily penalties of 4% will then begin to accrue.
For VAT taxpayers these new penalties will come into play for periods starting on or after 1 April 2022. For those who pay income tax via Making Tax Digital it will be for accounting periods beginning on or after 6 April 2023. For all other income tax self assessment taxpayers it will be for the tax year starting 6 April 2024. However HMRC has promised a light touch for both VAT and income tax penalties in the first year, if the payment is less than 30 days late.
A slightly more lenient system will be introduced if tax returns are filed late. In this situation a penalty points system is being introduced to penalise non-compliance before a fine is levied. A £200 penalty for late submissions will be issued only when the relevant points threshold is reached. This points threshold will depend on how often a return has to be submitted. For example, the MTD system for income tax requires taxpayers to make five returns each year instead of one. When a taxpayer has reached their relevant points threshold, a penalty will be charged for that failure and every subsequent failure to make a submission on time.
Earlier tax payments may be coming
One of the consultations published on Tax Day seeks views on modernising the tax administration system. This includes changes to the dates when taxes are paid, for all those taxpayers who currently sit outside the PAYE (pay as you earn) system.
The consultation is focused on payments made under income tax self assessment (ITSA) or corporation tax (CT) for small companies. HMRC would like to see the payment of income tax and corporation tax being brought closer to the point at which the income is received.
Since it was introduced after the Second World War, PAYE has proved to be a highly efficient way to collect tax. VAT, which is collected through a regular instalment arrangement, also results in far less unpaid tax. Meanwhile ITSA payments on account are still generally made only twice a year, with a balancing payment rounding out any outstanding liability.
With corporation tax, the total amount is due in one lump sum, nine months and one day after the end of the company’s accounting period. This means there is a significant delay between when a company makes its profits and when it pays the corporation tax it owes.
Self assessment income tax and corporation tax account for 34% of all the outstanding debts owed to HMRC, so it is no wonder that HMRC feels an incentive to accelerate these payments. And it’s thought that many self-employed taxpayers may actually welcome the need to pay their tax more frequently, as it’s likely to help them budget and better manage their tax affairs overall.
However, one concern is how the tax liability would be calculated, given that ITSA and CT are annual taxes. This means for many taxpayers, the amount they owe can only be accurately assessed on an annual basis, and therefore in-year calculations are likely to be based on estimates, projections or the previous year’s liability.
An alternative solution already exists. This is an under-promoted budget payment plan, which is available to ITSA taxpayers who are up to date with their self-assessment payments and who wish to make regular payments towards their next tax bill via their HMRC online account. On Budget Day HMRC was granted funds to invest in this budget payment plan, and to make improvements to the facility over the course of 2021/22.
The consultation regarding a move to monthly or quarterly tax payments for ITSA and CT closes on 13 July 2021. Any changes are likely to be controversial, but the government has confirmed that they will not be made within this parliament.