Policy paper

Making Tax Digital volunteers and penalties

Updated 30 April 2024

Who is likely to be affected

This measure will affect taxpayers who voluntarily join the Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) service and their representatives, and who fail to submit returns on time or fail to pay tax on time.

These changes will take effect from 6 April 2024, with the first penalties potentially applied to annual tax obligations due in January 2026.

General description of the measure

This measure ensures all those who join MTD for ITSA from April 2024 are subject to the government’s reformed system of penalties (‘penalty reform’) for the late payment of tax or the late submission of a return.

The new penalty regime is simpler and fairer than the previous system. The new system will penalise those who persistently do not comply by missing filing and payment deadlines, while being more lenient on those who occasionally fail to meet obligations.

Policy objective

This measure ensures all taxpayers volunteering for MTD for ITSA from April 2024 are subject to the government’s new, fairer penalty regime for late filing of tax returns and late payment of tax.

Background to the measure

Penalty Reform provides fairer, points-based sanctions for late submission of returns and more proportionate penalties for late payment of tax liabilities.

A tax information and impact note about the interest harmonisation and penalties for late submission and late payment of tax was published on 3 March 2021.

This new approach assures the compliant majority that an occasional failure in the context of overall good compliance will not be treated in the same way as persistent poor compliance.

Detailed proposal

Operative date

Primary legislation is required to apply the new penalties system to MTD for ITSA volunteers from April 2024 (with penalties only charged on annual obligations arising in January 2026). The measure will have effect from the date of Royal Assent to Autumn Finance Bill 2023.

Current law

Late submission penalty

For ITSA, late submission penalties are set out at paragraphs 1 to 6 of schedule 55 to Finance Act (FA) 2009 (with paragraphs 6(3)(a) and (4)(a) providing a higher penalty for deliberate withholding). A penalty of £100 becomes chargeable as soon as a return is late. A £10 daily penalty becomes chargeable when a return remains outstanding 3 months after the deadline. A penalty of £300 or 5% of the tax liability (whichever is greater) becomes chargeable where a return is outstanding 6 months after the deadline and again at 12 months. A higher penalty can be charged for 12 months’ delay if the taxpayer deliberately withholds information by not submitting the return.

Late payment penalty

Current law for late payment penalties in ITSA is contained in FA 2009 schedule 56, table items 1, 12 and 17 to 19, and paragraphs 3 and 9 to 17. Financial penalties are charged at regular intervals:

• at 1 month late, 5% of unpaid tax is charged
• at 6 months late, 5% of tax still unpaid is levied as a penalty
• at 12 months late, 5% of tax still unpaid is applied as a penalty

Interest

In ITSA, the current law on late payment and repayment interest is contained in FA 2009, sections 101 to 103 and schedule 53 and schedule 54.

Proposed revisions

Legislation will be introduced in Autumn Finance Bill 2023 that will:

• commence a simplified regime of new penalties and disapply the existing penalties system
• make consequential and transitional provisions

Under the new regime, when a taxpayer misses an annual submission deadline, they will incur a penalty point. A taxpayer becomes liable to a fixed financial penalty of £200 only after they have reached the points threshold of 2 for late submission of their final declaration.

The taxpayer will also incur costs based on late payment of tax. The new late payment penalty will consist of two separate charges. The first charge will become payable 30 days after the payment due date and will be based on a set percentage of the balance outstanding A second charge will also become payable from day 31 and will accrue daily, based on the sum outstanding.

Summary of impacts

Exchequer impact (£ million)

2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029
—	0	0	negligible	negligible	-5

These figures are set out in Table 5.1 of Spring Budget 2024 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Spring Budget 2024

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure is expected to affect self-employed individuals and landlords who voluntarily join MTD for ITSA. HMRC will aim to reduce this impact by carrying out pre-implementation publicity and by providing information to those who wish to sign up.

The new penalty regime is simpler and fairer than the previous system. The new system will penalise those who persistently do not comply by missing filing and payment deadlines, while being more lenient on those who make the occasionally fail to meet obligations.

Those who do not meet their annual obligations, such as electronic submission of a final declaration on time or miss payment deadlines, will incur a penalty.

Late payment penalties will directly link to the tax amount owed and the length of time outstanding to encourage earlier payment. Over time, it is expected that the new regime will influence compliance and reduce the overall number of financial penalties.

Where a ‘Time To Pay’ arrangement is made within 15 days of the payment due date it will prevent a late payment penalty, as long as the Time To Pay agreement is upheld by the taxpayer.

There could be an impact on family formation, stability and breakdown if individuals receive a penalty that they are unable to pay. Some individuals could be more affected than others depending on their income levels and family circumstances.

This measure is expected overall to improve individuals experience of dealing with HMRC as it extends the new points-based penalty regime for annual tax return submission obligations to include taxpayers who join MTD for ITSA voluntarily for private and public beta testing. It provides greater consistency, fairness and certainty in the system, making it easier for taxpayers to comply with their submission and payment obligations and making late payment penalties more proportionate to the lateness of payment.

HMRC also has discretionary power to reduce or not to charge a penalty for late payment if it considers that appropriate in the circumstances. These will include where there are special circumstances that cause a taxpayer to pay their tax late. HMRC will actively consider all cases where this might be the case.

Equalities impacts

The MTD for ITSA testing programme focuses on tax years 2024 to 2025 and 2025 to 2026 for volunteers who wish to join the MTD for ITSA service, and have the choice to leave it, should they wish to do so. 

HMRC does not hold equalities information on those who currently receive late submission and late payment penalties, but this measure will make the application of penalties fairer for taxpayers joining MTD for ITSA on a voluntary basis.

‘Time to pay arrangements’ and ‘reasonable excuse’ provisions for late submissions and late payment will cover those unable to meet their obligations. This will protect taxpayers in vulnerable circumstances who, for example, may have suffered a bereavement, serious illness, or loss of business income.

Further ‘reasonable adjustments’ may apply to groups with protected characteristics who may, because of their circumstances, be less able to meet their obligations.

Making Tax Digital will require customers to provide data electronically to HMRC. A digitally exempt customer will therefore not be able to participate as volunteer as they will be unable to provide data electronically.

Impact on business including civil society organisations

This measure is expected to have an impact on ITSA sole traders and landlords who voluntarily sign up to MTD for ITSA, meeting annual obligations under a simplified form of Penalty Reform. It will also affect anyone working on behalf of taxpayers, for example, agents.

Overall it is expected to improve business’ experience of dealing with HMRC as it extends the new points-based penalty regime for annual tax return submission obligations to include taxpayers who join MTD for ITSA voluntarily for private and public beta testing.  It provides greater consistency, fairness and certainty in the system, making it easier for taxpayers to comply with their submission and payment obligations and making late payment penalties more proportionate to the lateness of payment.

One off costs will include those which result from businesses needing to familiarise themselves with the new late payment and late submission penalty regime. HMRC will aim to reduce this impact by carrying out pre-implementation publicity, notifying entry requirements for volunteers, and the associated terms and conditions for voluntary MTD for ITSA.

Transitional costs for Penalty Reform were previously published in a tax information and impact note on 3 March 2021.

There are expected to be no continuing costs for compliant businesses where the taxpayer does not incur a penalty.

HMRC also has discretionary power to reduce or not to charge a penalty for late payment if it considers that appropriate in the circumstances. These will include where there are special circumstances that cause a taxpayer to pay their tax late. HMRC will actively consider all cases where this might be the case.

This measure is not expected to impact civil society organisations.

Operational impact (£ million) (HMRC or other)

There are no further operational impacts than those set out in the tax information and impact note published on 3 March 2021.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

This measure will be monitored through information collected from HMRC’s systems including data on the issuing of penalties, points accrued and appeals and reviews.

HMRC will monitor implementation closely, collecting stakeholder feedback, and use this to inform any future changes that may be necessary.

Further advice

If you have any questions about this change, please contact Jim Rogers:

• on Telephone: 03000 588833
• by email: [email protected]