Revised Penalty Scheme for Late Tax Filing and Payment in UK

Revised Penalty Scheme for Late Tax Filing and Payment in UK - Encompassing VAT and Other Taxes

New UK Tax Penalty Regime for VAT to Take Effect from January 2023

The UK government has announced a new tax penalty regime for Value Added Tax (VAT) that will come into effect from January 1, 2023. This marks the first step in the harmonization process, with other taxes such as corporation tax yet to be included.

The new regime will apply to VAT payments only for accounting periods beginning on or after January 1, 2023. From this date, late payment penalties will use a points-based system to target repeated non-compliance. The maximum late filing penalty under the new regime is £200, lower than the maximum under existing regimes.

The initial late payment penalty will apply after 15 days, a reduction from previous regimes. The new regime will adopt a light touch to the first penalty in the first year of operation, not charging the 2% penalty at 15 days, but waiting until 30 days, at which point it will charge the full 4% penalty.

Businesses within the existing VAT default surcharge regime will start from zero points under the new regime. HMRC has confirmed that a taxpayer can challenge both points and penalties by way of appeal to the tax tribunal, including the option of an internal HMRC review prior to the appeal.

When the tax tribunal hears an appeal against a penalty, it also has the power to affirm or cancel any or all of the points that gave rise to the penalty. A taxpayer may appeal against the decision to impose a penalty and the amount, and the usual taxpayer safeguards of reasonable excuse and special circumstances have been included in the new late payment regime.

The usual provisions relating to bringing an appeal to HMRC first, HMRC reviews, and tribunal appeals apply equally to these new penalties. Administration of penalties, including appeals, will follow the same footing as existing regimes with minor variations.

The plans to harmonize the tax penalty regimes have been underway for decades. From January 1, 2026, companies with a turnover of more than £30,000 that are required to use Making Tax Digital (MTD) for income tax self-assessments will be subject to the new tax penalty regulation. The new late payment penalty regime for VAT is scheduled to be extended to income taxpayers starting from 2026.

There were comments in earlier consultations on penalty reform that these penalties would be rolled out to other taxes later, but no firm timelines have been included. Note that because the legislation treats the initial 15 and 30 day penalties as a single penalty, an appeal may only be brought against the penalty as a whole, not the separate parts of it at 15 and 30 days. A point or penalty does not arise where the taxpayer has a reasonable excuse for the failure.

This new regime is part of plans to harmonize the wider tax penalty regime in the UK. The government aims to create a fairer, more modern, and more effective tax system that encourages compliance and supports honest taxpayers.

Revised Penalty Scheme for Late Tax Filing and Payment in UK - Encompassing VAT and Other Taxes