Up until now, if you missed a submission deadline for VAT or tax returns, HMRC would issue you with an automatic fine, but this is changing. From 1 April, the new HMRC penalty system will be used, meaning fines will no longer be automatically issued, with penalty points being given within a set threshold instead.
If you’re a sole trader, self employed, or liable to meet tax deadlines, this change will affect you. With this in mind, we’ve put together a handy guide detailing everything you need to know about the new HMRC penalty point system so you can get to grips with it early on.
What is the new HMRC penalty system?
The new HMRC penalty system will replace the automatic fines that have been issued up until now. The points will be issued to those who must send their tax reports to HMRC but fail to do so by the set deadlines. Historically, if you missed a tax deadline, you’d be issued with an automatic fine off the bat, even if it was your first offence and was a genuine error.
Under the new penalty system, you won’t get an automatic fine, but instead, you’ll accrue penalty points. They’re akin to driving license penalty points, but if you accrue a set number of points, you’ll have to pay a fine.
The reason for the new HMRC penalty system being introduced is to try and level the playing field so to speak. It’s hoped that under the new rules, those who miss a deadline for the first time or who make a genuine mistake won’t be given such a harsh punishment. On the other hand, it will be easier to spot repeat offenders and issue them with harsher fines for persistent offences.
With this in mind, the new penalty point system is both more lenient and stricter at the same time.
What are the HMRC penalty rates?
Penalty rates depend on how often you are required to make a submission to HMRC. If you hit your penalty point threshold, you’ll be issued a £200 fine. If you miss another deadline after hitting this threshold, you’ll be issued a £200 fine per deadline you miss.
So, what are the penalty thresholds? As mentioned, this depends on how often you need to submit documents to HMRC. As a general rule of thumb, HMRC has set out the following penalty point thresholds (how many points you’re allowed until you’re fined):
If you are required to make an annual submission to HMRC, you will be allowed to accrue two points over two years. If you exceed this, you will be issued with a £200 fine and another £200 fine per deadline you miss thereafter. If you reach the threshold, your penalty points will be reset to zero provided you meet all your deadlines for another two years.
If you make quarterly submissions to HMRC, for example for VAT or self-assessments, you will be allowed to accrue four points over two years. If you exceed this, you are liable to pay £200 initially and a further £200 per quarterly submission you make thereafter. However, if you reach the threshold, you must meet all following deadlines for 12 months for your penalty points to be reset to zero.
If you need to submit documents to HMRC every month, you will be allowed a maximum of five points over two years. Like annual and quarterly submissions, if you reach your penalty point threshold, you will be issued with a £200 fine, with an additional £200 fine per deadline you miss thereafter. To get your penalty points to reset to zero after hitting the threshold, you must meet all your monthly deadlines for six months.
In terms of accruing penalty points, you will be given one set of points per tax obligation you miss. This is because generally speaking, companies and taxpayers may have different obligations to hit, but HMRC have introduced the points in this way so that people don’t accrue a high number of points resulting in hefty fines.
With this in mind, a good example is if you hit your VAT deadline but miss your self-assessment deadline, you’ll only accrue points for the self-assessment deadline that you missed. That being said, if you missed both deadlines, you’d get points for each. This means if you consistently fail to hit deadlines, you could quickly find yourself with steep fines.
This goes back to the idea that HMRC wants the new system to punish those who consistently miss deadlines, but those who miss a one-off deadline won’t necessarily have to pay a large fine for an innocent mistake.
There may be instances where you need to make two submissions for the same obligation in one month. HMRC has stated that if you miss both deadlines for the same submission obligation in one month, you will only accrue one set of penalty points. It’s hoped that by doing this, you’d make an effort to improve your timekeeping to avoid further penalties and potential fines.
That being said, it’s important to note that under the new Making Tax Digital rules, if you need to submit a quarterly self-assessment and an annual tax return within the same month and both are submitted late, you will incur a set of penalty points for both.
When does the HMRC penalty system come into force?
There are three different dates that you need to be aware of for the new HMRC penalty point system. They are as follows:
- 1 April 2022 – if you are due to submit VAT returns to HMRC, the new system will come into force on 1 April 2022 for you
- 6 April 2024 – if you need to submit a self-assessment and your income from business dealings or property income exceeds £10,000 per year, the new system will come into force on 6 April 2024 (you will also need to submit quarterly updates using the Making Tax Digital system)
- 6 April 2025 – if you submit self-assessment tax returns but do not exceed £10,000 per year in income, the penalty point system will be effective as of 6 April 2025
There are lots of key dates happening in April, but if you have a VAT tax obligation to HMRC, make sure you pencil this change into your diary. The last thing you want is to start off with a penalty point.
Keen to learn more about tax planning, R&D tax credits, and saving money on your tax bill?
We’ve put together a handy School of Startups guide on director’s tax and limited company tax to help you navigate the tricky world of taxes as a whole.Download now
New late payment penalties
In line with the new penalty system, HMRC has introduced two new late payment penalties. If you fail to pay your outstanding tax within 15 days of its due date, you will be issued a fine equal to 2% of the unpaid tax. If you fail to pay your outstanding tax within 30 days of its due date, you’ll be issued a fine equal to 4% of the unpaid tax. Following this, you will be issued with a penalty equal to 4% per year every day your tax remains unpaid after the 30 day period.
How long do HMRC penalty points last?
The big question you’re likely asking is how long do HMRC penalty points last? Under the new rules, penalty points will last for two years, but this is only if you don't hit your points threshold and reach every deadline.
For example, if you have to make quarterly submissions to HMRC and only miss one deadline, you’ll only accrue one point. This is well within the threshold which means after two years, the point will be wiped and you’ll be reset to zero.
In contrast, if you have to make quarterly submissions and miss five deadlines, you’ll have exceeded your threshold and will need to pay the relevant fines, and you’ll need to hit every deadline for 12 months before the points are wiped.
It’s also worth noting that for these penalties to be removed, you need to ensure all the correct documentation from the previous two years has also been submitted.
Can penalty points be given for historical late submissions?
HMRC penalty points can only be levied within a certain time frame. If that time frame passes and HMRC hasn’t yet issued you with points, they can’t then do so at a later date. This means you can’t be issued points for historical submissions.
You may have noticed a pattern that under the new system, time frames are different depending on how frequently you are obligated to make your submissions. The same goes for levying points. The time in which HMRC can issue you with points depends on how often you are required to submit your documentation.
For annual submissions, HMRC has 48 weeks to issue you with penalty points. For quarterly submissions inclusive of self-assessments under Making Tax Digital, HMRC has 11 weeks to issue you with late submission penalty points. For monthly tax submissions, HMRC has two weeks to issue you with penalty points.
If these time frames pass and HMRC hasn’t issued you with points, they cannot then do so, even if your submissions are late.
What is the HMRC penalty appeal process?
You can appeal HMRC penalty points in two ways: using the HMRC internal review process, or by appealing to the courts through the First Tier Tax Tribunal. To appeal penalty points, you must be able to convince HMRC that there is a ‘reasonable excuse’ as to why you missed the deadline. Reasonable excuses permitted by HMRC include:
- ·Issues with HMRC software
- Terminal illness
- Technical issues
- Delays with postal services
If HMRC is satisfied you have a reasonable excuse for missing your deadline, they may overturn your penalty points.
Changing your tax reporting frequency
You can request a change in the frequency you submit tax returns. If you do change the frequency, the points threshold you’re allowed will change in line with it. For reference, below is a list of the adjustments made to your penalty point threshold if you make report frequency changes:
- Changing from annually to quarterly – your threshold will increase by two additional points
- Changing from annually to monthly – your threshold will increase by three additional points
- Changing from quarterly to annually – your threshold will decrease by two points
- Changing from quarterly to monthly – your threshold will increase by one additional point
- Changing from monthly to annually – your threshold will decrease by three points
- Changing from monthly to quarterly – your threshold will decrease by one point
If you’ve already accrued points, HMRC will automatically adjust them in line with your new reporting deadlines. If you haven’t accrued any points, you will remain on zero.
HMRC has designed the new penalty system to be fairer on innocent offenders and harsher on those who continually flout deadlines. Whilst the service is on the whole more lenient, it is in your best interests to meet your tax deadlines the first time round to avoid incurring penalties and fines against your business.
We're Accountancy Cloud
Accountancy Cloud can help you with this. Our expert accounting software integrates tax and bookkeeping services with a tax planner to ensure you never miss a deadline and pay your owed tax without any issues or penalties from HMRC. We can also provide advice on how to get your tax bill down to ensure you retain as much of your money as possible.
If you would like to find out more about how our financial experts can help you close your books, monitor your cash flow, and meet your tax deadlines to avoid penalties, please contact us. We will talk you through our expert accounting software, the switching process, and how else we can help your business better manage its money and get a grip on your finances as a whole.
#1 finance partner for tech & eCommerce startups
Accountancy Cloud makes accounting easy, transparent and truly fast, by offering entrepreneurs a custom blend of software and expertise.
- 100% online
- 9/10 customers recommend us
- Full finance stack for all your accounting needs