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HMRC Favouring New Rules for the Tax Penalty System

Published by Prerana
Posted Date: May 28, 2024 , Modified Date: May 28, 2024

HM Revenue and Customs (HMRC) is consulting with the Institute of Chartered Accountants in England and Wales (ICAEW) on drafting new rules for the VAT late payment penalty before the tax is paid in full. HMRC hopes to charge the second penalty even if you haven’t paid all your taxes yet and before the two-year deadline through this new rule.

How Late Payment of VAT Penalty Works?

The late penalty of VAT payment applies to all VAT accounting periods starting from or after 1 January 2023. Also, taxpayers who have volunteered for the Making Tax Digital (MTD) scheme are subject to the late penalty starting from April 2024.

Furthermore, the late VAT payment penalty will apply to all other MTD for Income Tax Self Assessment (ITSA) from 6 April 2026. This will apply to:

  • Taxpayers with income over £50,000 per year from the Tax Year 2026/27
  • Taxpayers with income over £30,000 per year from the Tax Year 2027/28

Currently, taxpayers are subject to late payment penalties based on the overdue date.

Payment Up To

First Late Payment Penalty

Second Late Payment Penalty

15 days overdue

None

None

Between 16 and 30 days 

2% on VAT owed

None

31 or more days overdue

2% of outstanding due on day 15 plus 2% of outstanding due on day 30

A daily rate of 4% per year on the outstanding balance (Calculated every day from day 31 until payment is paid in full)

What Are the Proposed Changes?

HMRC’s main agenda is to amend the rules of the second penalty. The tax authority can currently assess the second penalty only when the tax is paid in full and within two years of the due date. Also, you will get penalty points based on the accounting period of your business or individual VAT return. However, HMRC wants to make changes to this rule and assess the second penalty before the tax is paid in full and before the end of the two-year mark.

vat late payment penalty

The amendment of this rule will prevent taxpayers from intentionally avoiding the second penalty by not paying the tax before the end of the two-year mark. The deadline for ICAEW to respond to this consultation is 10 June 2021. ICAEW is taking your comments, which could contribute to their response through email.

Conclusion

HMRC is consulting the ICAEW for new changes to the late penalty of VAT payment. With the new rules in charge, HMRC hopes to prevent taxpayers who avoid paying the second late penalty charge. The amendment of the new rule will help HMRC assess the second late penalty before the tax is paid in full and before the two-year deadline.

Prerana
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