Tax Insider Tips: A New Penalty Regime For Businesses

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Satwaki Chanda discusses the proposed new penalty regime for businesses following July’s draft Finance Bill.
 
The government is proposing to introduce a new penalty regime for businesses, covering VAT, income tax and corporation tax:
  • a reform of the way in which penalties are charged for late filing of returns. This is based on a points system similar to that which applies for driving offences; and
  • a reform of the way penalties are charged for late payment. The system will be geared towards encouraging taxpayers to pay early rather than late.
These measures have come about as a result of a series of consultations, culminating in draft legislation following July’s draft Finance Bill.
 
Penalties for late submission of returns
Under the new proposals, a person will collect a penalty point for each occasion that he files a late return. However, no penalty will actually be charged until the taxpayer has accumulated enough penalty points to take him over the relevant threshold:
 
Submission of return (frequency)Frequency of breach
Annual2
Quarterly4
Monthly5
Penalties for late payment of tax
The new penalty regime will operate as follows:
  • the first 15-day period after the due date is a penalty-free zone. No charge will be levied if the tax is paid, or a ‘time to pay’ agreement is made within this period;
  • penalties will begin to apply from day 16 onwards. An initial charge will be levied amounting to a percentage of the tax outstanding at the end of day 15. This percentage is not yet known but is expressed as 0.5x % in the draft legislation;
  • if any tax remains unpaid after day 30, an additional penalty will apply. This will be the same percentage 0.5x % applied to the amount outstanding at the end of day 30. This is additional to the initial charge that applies from day 16 (see above) – in short, the penalty rate is effectively doubled from day 31; and
  • a further penalty will be charged from day 31, calculated as an amount of interest (‘penalty interest’). Penalty interest will run from the 30-day mark until payment is made in full. The rate of interest has not yet been determined, but it will not be calculated by reference to base rates.
As with the rules for late filing, the amount of the penalty can be reduced if the taxpayer has a ‘reasonable excuse’ defence.
 
Coming soon?
It is proposed that the regime for VAT will be enacted first so as to apply from 2020 in accordance with the making tax digital timetable. Provisions for income and corporation tax purposes will follow at a later date. See www.gov.uk/government/publications/interest-harmonisation-and-sanctions-for-late-payment for further information.
 
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