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Making Tax Digital - Penalties

The draft finance bill 2018-19 was published in July which contained details of the new penalty regime for late submission and late payment. The new law will apply to most taxes but this article considers the new law in relation to Making Tax Digital for VAT.

Late filing of VAT returns

It has been confirmed that a points based system will be operated for the late submission of VAT returns. Under the new system, a point will be given for each VAT return that is submitted late. Once a business accrues a certain number of points a financial penalty will be charged. A penalty will continue to be charged for each subsequent failure but the points will not increase. The points threshold depends on the frequency a business files VAT returns.

  • Annual
  • Quarterly
  • Monthly
  • 2 points
  • 4 points
  • 5 points

It has also been confirmed that points will have a shelf life and will expire after a period of good compliance. The period of good compliance depends on filing frequency but also that all returns for the preceding 24 months have been filed.

  • Annual
  • Quarterly
  • Monthly
  • 2 submissions
  • 4 submissions
  • 5 submissions

HMRC have the power to exercise their discretion and to not apply points if a taxpayer has a reasonable excuse, for example when software fails. As many businesses will be required to use specific software to comply with Making Tax Digital this news is particularly welcome. Taxpayers will have the right to appeal against points and penalties issued.

Late payment of VAT

The draft finance bill also outlines the intended penalties for late payment. The technical note supporting this also details the plans to harmonise interest charged on late payment. These changes will be effective from April 2020.


Interest will be charged on the outstanding amount of tax from the due date until the payment is made. HMRC will be required to pay interest to taxpayers on VAT owed for the period between the repayment return being submitted and the repayment being actioned. Interest will not accrue for any period in which HMRC raise an enquiry into the relevant VAT return, HMRC needs to correct VAT errors or where security is requested.


The new late payment penalty will consist of two charges. The first charge is payable if payment is not made within 15 days of the due date (or the Time to Pay condition is not met). The first charge is summarised in the table below.

  • 0-15


  • 16-30


  • Day 30
  • Payments made
  • TTP is agreed


  • Payments made
  • TTP is agreed


  • N/A
  • No penalty payable
  • The penalty is suspended


  • The penalty will be calculated at a reduced percentage
  • The penalty will be calculated at a reduced percentage and suspended for the amounts subject to the TTP


  • The first charge is calculated based upon payment activity in the month

The second charge is applied if payment is not made by the 30th day after the due date. The penalty will be applied to the tax outstanding until it is paid in full.

During the first or second charge period a taxpayer can make a Time to Pay (TTP) arrangement with HMRC to agree a future date to pay the outstanding balance. When this is agreed the penalty will be suspended. This is to encourage businesses experiencing financial difficulties to get in touch with HMRC. If a TTP arrangement is broken, the penalty is treated as if it was never suspended and continues to be charged.

As per the late submission penalties, a penalty may not be applied if it can be demonstrated that the taxpayer had a reasonable excuse. If a penalty is applied, the taxpayer is able to appeal in the normal way.

This is a significant change to the penalty system for late submission and late payment which are currently dealt with through the combined default surcharge.

We are hosting a seminar on Making Tax Digital for VAT in conjunction with St Helens Chamber of Commerce on 27th September 2018.

If you would like to discuss these changes please contact our VAT partner, Alison Birch.

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    To discuss this feature further please contact Alison Birch:

Strength in Numbers Autumn 2018
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