Following on from VAT returns, the penalty regime will then be extended to Making Tax Digital (MTD) Income Tax Self-Assessment (ITSA) for accounting periods beginning on or after 6 April 2023. This will work in tandem with HMRC’s extension of MTD (from the same date) for taxpayers with business or property income over £10,000 per year. 

The new penalty scheme will then be extended to all other ITSA taxpayers for accounting periods beginning on or after 6 April 2024.

Under the new regime, a penalty point will be incurred for each missed submission deadline. This is where we see a change from the current system where financial penalties are usually automatically issued when a taxpayer does not meet a filing or payment date.

At a certain level of points incurred, a financial penalty of £200 will be charged. The threshold will vary depending on the required submission frequency.

The penalty points will have a lifetime of 2 years, which will be calculated from the month after the month in which the failure occurred. However, once the penalty threshold has been met, the points will only reset to zero following a period of compliance by the taxpayer and when all outstanding submissions from the previous 2 years have been submitted.

HMRC have confirmed they will be operating a light-touch approach for the first 12 months of operation of the new system for both VAT and ITSA. This means we are likely to see HMRC refrain from charging late payment penalties on tax paid up to 30 days late in the first year.