The draft Finance Bill 2018/19, released in July 2018, revealed some striking new changes to the current penalty system in place for those who file their tax returns late. The changes look to impose stricter disciplinary measures on those who are repeatedly late in filing their returns, whilst offering some leeway for those who may just have a one-off problem with filing their return.

What happens if you are late filing penalties currently?

Under the current system, a penalty is applied as soon as the filing deadline is missed, and penalties continue to be accrued as time goes on, for as long as the bill goes unpaid. In some cases this will become a daily penalty, if the bill remains unpaid for long enough.

What will the new system be?

Under the new system, the taxpayer can still expect to pay interest on their return if they file late, but an immediate penalty will not be applied. Instead, a late return will result in the taxpayer getting a point on their record, which will remain there for two years.

A taxpayer can dispute points and they may be removed in the case of exceptional circumstances, such as:

  • Software failure
  • HMRC service issues
  • Serious of life-threatening illness
  • A death in the family

However, this is at the discretion of HMRC. Disputed points remain on your record up until a decision has been made regarding your appeal. A penalty will be applied once the taxpayer reaches a certain points threshold, depending on how often they need to file a return. This will be as follows:

Annually          –           2 points

Quarterly         –           4 points

Monthly           –           5 points

After the penalty has been applied the taxpayer will no longer accrue points but the points also won’t expire after two years, and will remain until the taxpayer has met their submission deadlines for a fixed ‘good compliance’ period. This is likely to be 2 submissions for annual returns, 4 submissions for quarterly returns and 6 submissions for monthly returns. Penalties will continue to be applied until the compliance period has been completed successfully and, after it has the, points balance will return to 0.

The new system intends to encourage compliance twofold – by removing the initial penalty and giving taxpayers more time to comply, as well as by increasing the financial penalty for those who do not comply.

How will the new system be implemented?

HMRC intends to roll out this system slowly, to work out any issues before it becomes mandatory for everyone. In the first instance, the system is looking to affect VAT only, and only for Making Tax Digital for Business (MTDfB) VAT filing, as of April 2021. Other taxes will be brought in after this point, and more about this will be announced as time goes on.

The only taxes that will not apply to this legislation will be transactional taxes such as sales tax and immovable property transfer tax, as well as taxes which don’t require regular filing, such as inheritance tax.

HMRC have stated that individual taxes will result in individual penalties, rather than points accruing as one for individuals. This means that businesses or individuals who file multiple returns need to keep track of their individual filing dates and any points accrued for separate returns in order to avoid penalties. On the other side of the coin, though, it also means that two late returns don’t mean an instant penalty, as the two points will be split between two different taxes.

What will the penalties be?

There are only two levels of penalty under the new system. The first is applied for the first 30 days after the return is due, but can be mitigated if the tax that is due is paid within those 30 days, or a Time To Pay arrangement is set up within 15 days. The second occurs after 30 days and includes the full first penalty amount, as well as a second penalty (or ‘penalty interest’). This will continue to be added until the debt is paid in full. Late payment interest will become due as soon as the return is late in being filed, just as before.

As previously mentioned, there is no word yet on what the cost of the penalties might be, but it is a fair assumption that they will be considerably higher than they currently are as far fewer people will be paying them. Doing it this way not only allows the government to keep control of tax-based revenue, but also provides a far stronger reason for taxpayers to avoid paying late.

How can you prepare?

Whilst the initial draft legislation and explanation notes are available, the 2018 Budget announced that the reform won’t take place until April 2021 at the very earliest, so businesses and individuals have plenty of time to prepare.

Legislation regarding the new penalties is expected to form part of the 2020 Finance Bill, so there is not very much that needs to be done at this time, but it is worth getting your taxes in order sooner rather than later so that you are well prepared and able to get your taxes in on time when the reforms are put into place. The current penalty regime is still in place for the time being so, at the very least, it is worth getting comfortable with return dates and so on to avoid being hit with existing penalties in the meantime.

There will be a ‘soft landing’ approach to the reforms when they are put into place, allowing businesses to get used to the system and to try to prevent those who are struggling from accruing unnecessary penalties. For the time being all you need to do is:

  • Do your research and find out more about the reform and how it affects you either as a business or an individual.
  • Get to know the new system and put structures into place to make sure you are not missing deadlines, especially if you file more than one return because, under this legislation, you would be considered to have separate points totals and penalty liabilities for each of your businesses.

Speak to TFMC today

Penalties are always a painful topic and if you want some advice if you are unfortunate enough to have received one then speak to TFMC’s helpful advice team today on 0800 470 4820 or email

Tom Cowley
Tom Cowley

Tom brings a wealth of experience to The Financial Management Centre having started his working career as an accounts trainee working his way up to site number one over 20 years ago. He has extensive experience of working in the UK and overseas for a number of prominent groups including Unilever, Shell, Costain, Smit International, Arcelor Mittal and Columbus McKinnon.