The measure proposes a points-based penalty system for late payment and two changes to the way that interest is charged and repaid for VAT, with the VAT changes coming into force from April 2020, but no date for the launch of the points-based system.

From 2020, late payment penalties will consist of two penalty charges, one charge based upon payments and agreements to pay in the first 30 days after the payment due date, and another charge based on how long the debt remains outstanding after the 30 days.

However, it a time to pay agreement is not agreed, then the payment window will only be 15 days. There will be no penalty if payment in full is made before end of the 15-day period.

If a time to pay agreement is made, but the taxpayers then breaks the deal and fails to pay, a second penalty will also be charged.

As with existing penalties, there is a ‘reasonable excuse’ clause, with the usual provisos that inability to pay and reliance on a third party are not acceptable excuses.  

Although the VAT penalties will take effect from April 2020, the government has not confirmed yet when the income tax and corporation tax penalty system will come into force, and has not calculated the Treasury impact of the measure

In a statement, HMRC said: ‘The changes will ensure that people who pay late can avoid a penalty if they take action to make arrangements to pay, and that those that do not will receive a penalty that is proportionate to both the value of the debt and the amount of time it is outstanding for.

‘The measure is designed to encourage those who cannot pay to agree a Time to Pay arrangement as quickly as possible and only penalise those who do not.’

Late payment penalty revisions

First charge:

Second charge:

A second charge will also become payable and will be calculated on amounts outstanding from day 31 after the payment due date until the outstanding balance is paid in full. Any TTP agreed during this period will also result in future penalties being suspended from the date the TTP was agreed.

Notice of penalty:

Both the first charge and second charge will be notified to the customer and any amounts shown as payable on the notice will be required to be paid, or appealed, within 30 days of the date of that notice.

A staged implementation of the measure is expected starting with VAT from 1 April 2020.

Interest revisions for VAT are expected to be implemented for VAT returns starting on or after 1 April 2020.

HMRC expects to publish an updated tax information and impact note when further details of the regime, including the rates of the penalty, are announced. This measure will be introduced alongside the related late submissions penalty regime as a package.

These penalties reflect the regime introduced for the new Making Tax Digital for VAT rules, also announced with the release of the Finance Bill 2018 draft documentation. Late payment penalties for VAT, known as default surcharge, and repayment supplement were introduced in the mid 1980s and will now be replaced by late payment interest, repayment interest and late payment penalty.

LITRG technical officer Joanne Walker said: ‘There are aspects of the regime that may prove complex to administer and explain to taxpayers since there are three sets of rules for the application of points, which are largely determined by the frequency of tax returns required.

‘The inclusion of key safeguards, such as a provision for HMRC to allow for familiarisation periods, provisions for the expiry of old points and reasonable excuse are essential for the protection of taxpayers, is essential.’

HMRC Policy paper Interest harmonisation and sanctions for late payment

Report by Sara White