Budget 2021 – Overhaul of the Penalty Regime

First published on 05 March 2021 by Alastair
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The budget announced a major overhaul of the penalty regime in relation to late submission of tax returns, late payment of tax and the harmonisation of interest rate for VAT and Income tax.  This is in line with documents that the government has published in the past in connection to Making Tax Digital.


None of these changes will have an immediate effect, but it an area everyone will need to familiarise themselves with in the coming years.


When Do the Changes Apply?



for periods starting on or after 1 April 2022

Income Tax:

For those with Business or Property income over £10,000

For all others


from the tax year starting 6 April 2023

from the tax year starting 6 April 2024

What Is the New Regime?

Late Submission Penalties

For late submission, the new penalty regime will move away from a ‘one size fits all’ approach and to a points-based system.  This is to work as follows:

  • If a filing deadline is missed, a point is given. Points accrue separately for VAT and Income Tax.
  • A £200 penalty will be issued if a specified number of points are accrued.
  • The number of points required for a penalty to be issued depends on the filing frequency of the return. The points threshold is two points for annual submissions, four points for a quarterly submission and 5 points for monthly submission.
  • The points will automatically expire after 24 months provided that the taxpayer remains below the points threshold.

At this time no further information has been provided as to how many points you have to accrue before the £200 is issued.

It could however become expensive for repeat offenders, particularly as the new penalty regime will coincide with the introduction of the resurrected Making Tax Digital regime and could lead to accruing points rapidly if quarterly ‘returns’ are submitted late.

Late Payment Penalties

For late payment, the penalties will be based on the amount of tax owed and how late the payment is.  This is to be implemented as follows:

  • No penalty on tax paid up 15 days after the due date;
  • 2% penalty on tax unpaid between 16 and 30 days after the due date;
  • 4% penalty on tax unpaid tax after 30 days; and
  • A further 4% annualised penalty rate chargeable on outstanding tax due after 30 days.

Penalties will not apply if the taxpayer enters into a time to pay arrangement with HMRC.  Additionally, if there is a reasonable excuse for non-payment of the tax, HMRC can agree not to assess and this would save the taxpayer having to appeal against the penalty (although we wouldn’t hold our breath here).

Chris Leslie, Tax Senior

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