What Are the New Points-Based Penalty Regime Under MTD ITSA?
HMRC is rolling out a new point-based penalty system for self-employed individuals and landlords under the Making Tax Digital for Income Tax (MTD ITSA) regime. Under this new MTD ITSA penalty system, you will receive a penalty point for each late submission, with financial penalties only kicking in once you hit a set threshold.
So, why the shift? The old system was criticised for being too harsh, charging fines even for a single late submission. This new system aims to change that by adopting a fairer and more consistent approach to penalising late submission and focusing on repeated non-compliance over one-off errors.
In this blog post, we will break down what is changing with this new law, who is at risk and how the new penalties work.
Introducing The New MTD ITSA Penalty Regime
Under this new points-based penalty system, taxpayers who miss a submission deadline will receive a point instead of an immediate financial penalty. A financial penalty will only kick in once a certain threshold is reached.
For example, if the taxpayer misses their initial VAT return deadline, they might face an immediate £100 fine under the old system. However, under the new points-based penalty regime, taxpayers will receive a penalty point and will only face a £200 financial penalty once they reach a certain threshold.
This provides taxpayers with more time to correct their mistakes and penalise repeated offences rather than occasional mistakes.
Who is Likely to Be Affected?
This new measure will automatically apply to VAT-registered businesses with accounting periods starting on or after 1 January 2023 and to taxpayers who voluntarily join the MTD for ITSA service and their representative.
However, these changes will apply to ITSA customers such as self-employed individuals, landlords, and small business owners once they become mandated to Making Tax Digital.
Key Dates: When Do the New Rules Apply?
The first phase of the new point-based penalty system for Making Tax Digital (MTD) was introduced on 1 January 2023 for VAT submissions, followed by Income Tax Self-Assessment (ITSA) volunteers effective from 6 April 2024 for the tax obligation due in January 2026.
These changes will apply to ITSA customers once they become mandated to Making Tax Digital (MTD). For instance, it will apply to all ITSA taxpayers with property or business income above £50,000 from 6 April 2026, and to those making over £30,000 from 6 April 2027.
For all other ITSA customers with property or business income below £30,000, corporates, trusts and general partnerships who are currently outside the scope of MTD, these changes will apply after the introduction of MTD for the taxpayers.
How do Late Submission Penalties Work?
The new submission penalty will apply to regular submission obligations and will ultimately replace the deliberate withholding penalty for ITSA set out in para 6 of Schedule 55 to the Finance Act 2009 (FA 2009).
Under this new points-based regime, taxpayers will incur a point every time they miss a submission deadline. Once a taxpayer reaches a set threshold based on how often they submit, a £200 penalty will be issued. The thresholds are:
Once the threshold is reached, every missed deadline triggers another £200 penalty, but no additional points are added.
How Points Are Tracked Across Multiple Tax Submissions
Taxpayers will have separate points total for each regular tax submission, such as ITSA and VAT and they will receive a separate point for each type of obligation they have.
For example, if taxpayer misses an annual ITSA return and quarterly VAT returns, they will receive one point each for ITSA and VAT. These points will be tracked separately.
However, if a taxpayer misses multiple types of deadlines in a single month such as quarterly updates, End of the Period Statement (EOPS), and final declaration in the same month, they will receive a point for each, up to three points total.
Notes
- If you miss similar deadlines across multiple businesses in the same quarter, you will incur only one point in total
- HMRC will notify every time they levy late submission point
How Long Does HMRC Have to Issue Penalty Points?
HMRC has specific time limits ranging from 2 weeks to 48 weeks to issue penalty points for late submissions, as follows:
Note that the time limit starts from the day the failure occurred.
Once the taxpayer has reached the penalty threshold, HMRC has up to 2-year limit to charge a financial penalty. However, it can be extended in certain circumstances. For example, if a Tribunal cancels a point or penalty, HMRC has 12 months from the Tribunal’s decision to apply any points or penalties that would have accrued but not been added to the points total because the taxpayer was already at the penalty threshold.
Similarly, if HMRC discovers any previous submission that it was unaware of at the time, it can levy points and financial penalties within 12 months from the date of the discovery.
Do Penalty Points Expire?
Individual penalty points will expire after 2 years from the month following the missed deadline. However, if the taxpayer is at the penalty threshold, he/she must meet the following requirements to reset penalty points.
- Meet the submission deadline for a set period of compliance
- Submit all the returns due within the preceding 24 months, even if these submissions were initially late.
The set periods of compliance are:
Warning
If the taxpayer at penalty threshold fails to submit outstanding submissions, they will remain at penalty threshold forever and be charged penalties on further mistakes even if they have achieved the period of compliance.
How do Late Payment Penalties Work?
The new late payment penalties regime will replace the current late payment penalties in Schedule 56 of the Finance Act 2009 (Schedule 56 of the FA 09) for ITSA taxpayers. However, for VAT businesses, it will replace the default surcharge, which served as a combined late submission and late payment sanction.
Under the point-based penalty regime, late payment penalties will apply in two stages.
The first penalty will apply if the tax remains unpaid after 15 days of the tax due date. It is set at 2% of the outstanding tax. An additional 2% penalty is charged if any of this tax is still unpaid after day 30.
Similarly, if the tax remains unpaid on day 31, the taxpayer will incur an additional penalty on the outstanding tax. It accrues daily at the rate of 4% per annum until the outstanding tax is paid.
What If I Need More Time To Pay My Taxes?
HMRC offers Time-to-Pay (TTP) arrangements for taxpayers who struggle to pay taxes on time. This lets you agree on a payment plan with HMRC. Once TTP is agreed, no further penalties will accrue from the day the taxpayer approaches HMRC as long as the taxpayer honours the terms of the agreement.
Here’s how it works:
If tax is still unpaid on day 31, an additional penalty will accrue daily at the rate of 4% per annum.
Special Cases & HMRC Discretion
HMRC holds the discretionary power not to issue a penalty if it considers it appropriate. For instance, HMRC can choose to waive or reduce a penalty for late payments where there are specific circumstances for reasonable excuse. If HMRC accepts the excuse, it may decide not to assess a penalty without the need for a formal appeal.
In addition to this, HMRC will take a light-touch approach for the first year of the new penalty system. Taxpayers making genuine efforts to comply will have 30 days to settle or arrange Time-to-Pay (TTP) arrangements before a 2% first penalty is applied.
Any use of these discretionary powers by HMRC will be carefully considered and exercised in line with published guidance.
How to Stay Compliant & Avoid Penalties?
To stay compliant and avoid any penalties under the HMRC’s new regime, ensure tax payments are made on or before the due date. If payment cannot be made, make sure to contact HMRC as early as possible and arrange a Time-to-Pay (TTP) arrangement.
Also, keep an eye on the points total and aim to reset your points by staying fully compliant for a set period of 6 months for monthly submissions, 12 months for quarterly, and 24 months for annual.
In addition to this, if you are facing difficulties in meeting your tax obligations, make sure to contact HMRC as soon as possible. HMRC may exercise discretion and waive penalties.
By following these key practices, you can stay on top of your tax obligations and avoid penalties under HMRC’s new regime.
Conclusion
The new points-based penalty system under MTD ITSA provides flexibility and aims to encourage consistent compliance rather than punish occasional mistakes. Points only get turned into penalties after repeated failures.
As the rollout for MTD progresses, this new penalty regime will apply to all taxpayers once they come within the MTD regime. Thus, it is essential for taxpayers to stay informed of potential deadlines and act quickly.
So, review your processes, keep accurate records and start preparing now! Remember, a stitch in time saves nine! For accountants, bookkeepers, and tax advisers, the best stitch is the use of engagement letter templates for their MTD ITSA services.
Sandeep Subedi
Sandeep is a rising finance professional with a sharp eye for numbers and a passion for turning complex tax rules into simple and smart solutions. Currently pursuing an ACCA qualification, he specialises in helping businesses stay regulatorily compliant.
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