The measure

This measure was announced at the March 2010 Budget.

It applies to VAT and other indirect taxes and excise duties and will complete the reform of the penalty regimes for late filing of tax returns and late payment of tax.

The new regime will replace the current range of penalties and will treat late payment of tax and late filed returns separately. It is designed to encourage filing and payment on a timely basis by introducing an escalating series of penalties depending on the number of failures within a set penalty period. Further penalties will arise if there is a prolonged delay in filing returns or paying the tax due.

Under the new regime:

• Businesses making quarterly returns will face a £100 penalty on the first occasion that a quarterly return is filed late. This failure also starts a penalty period which is set for one year;
• For each subsequent failure within the penalty period, the penalty escalates by £100 (up to a maximum of £400 per failure) with the penalty period being extended to one year from the date of the last failure;
• For prolonged failures, an additional penalty of 5% of the tax on the relevant return will be imposed at six and 12 months from the due date.

Businesses making monthly returns will face penalties of £100 for the first six defaults (this was originally three) in any penalty period and £200 for any subsequent failures (this was originally to a maximum of £400).

Businesses that pay tax late will also suffer penalties:

• For businesses making quarterly returns, the first late payment will start a penalty liability period of one year;
• A further default in that period will result in a penalty of 2% of the tax paid late;
• Subsequent defaults in the penalty period will result in penalties increasing to 3% and then to a maximum of 4% for the fourth and subsequent defaults;
• Prolonged defaults will be penalised at 5% of the tax at six and 12 months from the date of failure.

Businesses making monthly returns will face a similar regime except that after the first failure the tax geared penalties are 1% for the first three failures in any penalty period, 2% for the next three up to a maximum of 4% per failure.

Who will be affected?

Taxpayers who do not file their tax returns on time or pay their tax liabilities in full and on time for indirect taxes and excise duties.

When?

The implementation of new penalties for late filing and late payment requires changes to HMRC's computer systems and internal processes and is to be staged over a number of years. The new provisions will be brought into effect by Treasury Orders which will specify the dates from which they have effect.