FAQ: 2 new tax penalties you need to know about as of 1 Jan 2023

There's a lot happening in the world of tax. You only need to mention the words Making, Tax and Digital to cause grown accountants to hide under the bed.

But we might pity their clients even more. Taxpayers run the risk of being unable to keep up.

This article can help with two upcoming changes.

1 January 2023 sees new penalty regimes introduced by HMRC that penalise late submissions and payments. They replace existing regimes.

These initially affect VAT, but then will apply to Making Tax Digital for Income Tax Self Assessment (MTD ITSA) when it begins in April 2024.

They will subsequently be applied to all Self Assessment submissions as of the 2025/26 tax year, even if the individual or business isn't affected by MTD or VAT.

Below is everything you need to know.

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In a nutshell, what are the new penalty regimes?

In summary, 1 January 2023 sees the introduction of the following by HMRC:

1. A new penalty regime for late filing. This is based on the accumulation of points, in a similar way to car speeding penalties.?
2. A new late payment penalty regime.

The key points of the new penalty points regime are as follows. Note that this skips over potentially significant details in order to summarise, and should not be considered comprehensive or authoritative:

• For any late submission, one penalty point is applied.
• A financial penalty of ￡200 is applied once a points threshold is reached. This threshold is two points in the case of annual submissions, four points in the case of quarterly submissions (e.g. VAT returns or MTD ITSA periodic reports), and five points for monthly submissions.?
• Points tallies don't apply to individuals or businesses when taken as a whole. They apply to individual submission obligations. In other words, there will be separate points tallies for an individual's VAT and MTD ITSA reporting obligations.
• It's usually not possible for an individual to get multiple points in the same period e.g. a landlord who runs two businesses, and who misses all the MTD ITSA quarterly reporting dates, should get just one point. But there are important exceptions to this rule, including where different obligations fall within the same month.?

The key points of the new late payments regime are as follows (again skipping over potentially significant details for the sake of brevity):

• Up to 15 days after payment was due: no penalty.
• Days 16 to 30: 2% of the amount owed as of day 15 but only provided—after day 16 or on day 30 at the latest—the taxpayer pays in full or agrees a time-to-pay (TTP) arrangement with HMRC.
• Day 31 after payment was due: 2% of what was due on day 15, plus 2% of what was due on day 30.
• Also from day 31 onwards: 4% of the outstanding amount, applied daily.
• The standard 2.5% interest rate is applied, as with other HMRC penalty regimes.

This will replace the existing default surcharge for VAT. HMRC says the new late payment regime aims to harmonise penalties across MTD for VAT, MTD for ITSA, and the Self Assessment route, making it simpler for taxpayers.

What's the timeline for the new penalty regimes?

• 1 January 2023: The new penalty regimes apply to VAT.?
• April 2024: The new penalty regimes apply to all MTD ITSA reporting requirements, as of the start of MTD ITSA in the 2024/25 tax year.
• April 2025: The new penalty points regime applies to those using the traditional Self Assessment route as of the start of the 2025/26 tax year, even if they aren't within scope of MTD ITSA or MTD for VAT.

There's also a familiarisation/light-touch period of a year—see "Is there an introductory period?" below.

Have the new penalty regimes been postponed?

The new penalty regimes were due to begin as of 1 April 2022.?

HMRC announced in January 2022 that it would not be possible to get its systems ready in time. The new dates listed above were set at that time.?

When do the penalty regimes begin to apply?

All VAT periods beginning on or after the 1 January 2023 date are within scope.

This is an important point. VAT periods ending after this date, but begun in 2022, are not affected by the new penalty regimes, and the old penalty regimes continue to apply.

Similarly, the new penalty regimes only apply to MTD ITSA and Self Assessment periods that begin after the above dates.?

How are the penalty points applied?

The new penalties are applied automatically, and HMRC will notify the individual when it happens. It's not yet clear if agents such as accountants will be notified, too.?

Once notified of the penalty, the taxpayer has 30 days to pay, appeal or provide a good excuse (see below).

Do the points apply to irregular or occasional tax filing?

No.

Do the penalty points expire?

Points expire after two years, although this is counted from the month after the month in which the individual or business received the point.

In other words, this could effectively be two years and almost a whole month, if a submission deadline fell on the 1st, 2nd etc. of the month.

But points don’t expire in this period if the individual or business is at the penalty threshold (that is, a ￡200 fine has been applied or if the individual has missed submission deadlines since). As HMRC explains, the individual or business must be able to show good behaviour for points to expire.

For taxpayers at the penalty threshold, there's potential for points to expire following good compliance. This means points are reset to zero if the taxpayer ticks both these boxes:

1. They manage an unbroken period of submitting on time. This period is 12 months for quarterly submissions (again for both VAT and MTD ITSA), six months for monthly submissions, and 24 months for annual submissions.?
2. All submissions arrived with HMRC that were due in the last 24 months—even if they were initially late.

Are the penalties always applied?

HMRC has discretion not to levy penalty points or charges prior to them being applied. There’s also an introductory light touch period for the late payment penalties (see the question below).

But once the penalty has been applied, it's not going away without the individual or business putting up a fight (see “Can businesses or individuals appeal against the points?”, below).

Is there an introductory period?

HMRC says it will take a “light-touch approach” for the initial 2% late payment penalty in the first year of operation for VAT (1 Jan to 31 Dec 2023). It's not yet clear if this period will also apply to MTD ITSA or when the penalty regime is introduced for the Self Assessment route.

Also known as the period of familiarisation, effectively this means taxpayers have 30 days to contact HMRC in that first year of operation in order to pay, or sort out something like a time-to-pay arrangement (or explain their reason for being late).

However, if the taxpayer fails to take advantage of the 30-day largesse, then the penalties will be retrospectively applied from day 16 onwards, as they would if the light touch/familiarisation period didn't exist (e.g. 2% of the amount then, from day 31, 2% of what was due on day 15 plus 2% of what was due on day 30—and so on).

Can businesses or individuals appeal against the points?

Yes. Initially, they can appeal direct to HMRC. If that’s unsuccessful, then they move on to the First Tier Tax Tribunal. To quote HMRC, "The appeal process will be the same as the appeal process against an assessment of tax for the relevant tax on which the penalty is based."?

Are there time limits after which points can't be applied?

Financial penalties have a two-year time limit following the transgression, after which they can’t be applied by HMRC.?

Points cannot be applied after a certain time has passed.?

This is 48 weeks after the day the failure occurred for annual submissions, 11 weeks for quarterly submissions (again, for both VAT and MTD ITSA), and two weeks for monthly submissions.?

Are VAT groups affected by penalty points??

The points are applied to the representative member running the VAT group. If that person leaves, the points remain with the VAT group and are applied to the new individual taking the role.?

Where can I learn more?

HMRC says that more guidance will be published in December 2022.

HMRC says it'll monitor the implementation of the new regimes and potentially make future changes that may be necessary.?

Minimise the risk of missing a submission deadline—or getting a late payment penalty—by using AutoEntry to turn days of data entry work into hours.

Start your automation journey right now with a free, no-commitment trial. Be ready for MTD ITSA. See for yourself why AutoEntry is the market leader for data entry automation.