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Late payment penalty rules made clear

HMRC has explained the circumstances in which it will consider not charging a late payment penalty under the new regime. What’s the full story?

New penalty rules recap. The new regime for penalties for late tax payments will be phased in from April 2022 starting with VAT, followed a year later by some self-assessment tax bills. The new rules mean you won’t be charged a penalty if you pay your tax bill in full within the 15 days after the date it was due. If you pay later there’s an initial penalty equal to 2% of the tax owing. After 30 days from the due date a further penalty applies at 2% of the tax owing beyond day 15, plus another 2% of the tax owing as at day 30. Details of further penalties are set out in HMRC’s policy papers updated on 20 August 2021.

A soft landing. HMRC’s updated guidance says that it realises the new penalty regime will be difficult for some people especially in view of the relatively short time between the due date and when penalties are triggered. It will therefore “take a light-touch approach to the initial 2% late payment penalty for customers in the first year it applies” to VAT and income tax.

What does HMRC mean by a “light touch”? When the new regime begins, if you cannot pay on time HMRC will allow you 30 days from the tax due date to get in touch with it and make arrangements to pay. It will then not usually charge the initial penalty. Tip. If you expect not to be able to settle your full tax bill on time it’s better to approach HMRC as soon as you realise this. If you agree a timetable for settling the bill and stick to it HMRC won’t charge a late payment penalty . This will apply even after the light touch period has ended.

Reasonable excuse. As is the case under the current rules, the new regime allows for penalties to be cancelled where you have a reasonable excuse for paying late, e.g. a significant illness. If you want to claim a reasonable excuse you must make send an appeal (by post or electronically) to HMRC.

HMRC will take a “light-touch approach” for the first year of the new penalty regime starting in April 2022 for VAT and 2023 for income tax. It won’t charge a penalty if you agree terms of payment within 30 days.