If tax is paid late, HMRC can charge a penalty for failure to make payments on time.

At a glance

Late payment penalties under schedule 56 FA 2009 apply in respect of the following taxes:

Tax From when / (enabled by) Legislation
PAYE, NICs, CIS 6 April 2010 (SI 2010/466)

S107 & Sch 56 FA 2009

IT, CGT 6 April 2011 (SI 2011/702)
ATED 17 July 2013 (s164 & Sch 34 FA 2013)
DPT 1 April 2015 (s104 FA 2015)
Accelerated Payments 17 July 2014 S226 FA 2014 & Sch 56 FA 2009


Under sch 56 penalties are set as follows:

Late payment Penalty
30 days late 5% of tax due
6 months late 5% of tax outstanding at that date
12 months late 5% of tax outstanding at that date

 

Time to pay agreements

  • If the taxpayer makes a time to pay agreement with HMRC the penalty is suspended.
  • The taxpayer will become liable to the penalty if the agreement is broken.

 Special reduction

  • HMRC has a statutory requirement to consider whether any special circumstances exist and if so it may override the statutory penalties and reduce them as it sees fit. 
  • If HMRC fails to consider special circumstances then its decision is "flawed".
  • If there is no evidence of HMRC considering any special circumstances a taxpayer may also appeal against the penalties on the basis that its decision to charge penalties is flawed. 
  • A tribunal may then consider whether to reduce the penalties. However it can only make a reduction where special circumstances exist.
  • "Special circumstances" mean uncommon, exceptional, abnormal or unusual circumtances.

 Appeal 

Sch 56 FA 2009 provides for the appeal process and it is advisable first off to ensure that any penalty charged has been made correctly according to the legislation.

  • The taxpayer has 30 days to lodge an appeal with HMRC against a tax penalty.
  • A late appeal may be accepted at the discretion of HMRC or the tribunal judge.

See: How to appeal a tax penalty and Appeals: Grounds for appeal toolkit for detailed guidance and hints and tips.

What's New? 2019-2020

In Budget 2018 the chancellor announced that legislation will be introduced to ensure that interest is charged as intended on late payments of, and repayments of, Corporation Tax, Diverted Profit Tax, IHT, Stamp Duty, and SDLT, as well as relating to late payments of PAYE penalties. This has retrospective effect from Royal Assent of Finance Bill 2019 on 12 February 2019.

Following Budget 2018 measures in draft Finance Bill 2019 for new penalties for late payment of Corporation Tax, Income Tax, Capital Gains Tax, and VAT have been dropped and will now be included in a future Finance Bill.

In July 2018 HMRC published a policy paper, ‘Interest harmonisation and sanctions for late payment’ alongside the draft Finance Bill legislation to bring in replacement rules for penalties for late payment.

These changes are not expected to apply before April 2021 but there is no confirmed start date.

They are proposed to replace the existing rules for SA, CT and VAT late payment penalties rules.

These proposed measures will replace the existing schedule 56 FA 2009 Late Payment penalty rules. 

  • No penalty will be payable if:
    • The tax is paid in full before the end of 15 days from the due date, or
    • A time to pay agreement is made with HMRC and the proposal was made within the first 15 days.
  • The penalty will be half of the applicable percentage x the tax outstanding if:
    • The tax is paid in full between 16 and 30 days from the due date, or
    • A time to pay agreement is made with HMRC and the proposal was made within the 16 – 30 day period.
  • If the time to pay agreements are broken, the full penalties will fall due.
  • The other half of the applicable percentage x the tax outstanding will become payable after 30 days where there is no time to pay agreement.
  • After 30 days, the penalty will continue to accrue at the applicable percentage. Again relief will be available where there is a time to pay agreement in place.

Provisions are in place to allow for a Reasonable excuse, for the usual Appeals procedure, and to ensure there is no ‘double jeopardy’ where the taxpayer has been subject to a conviction for an offence.

The proposed legislation follows HMRC’s December 2017 consultation, ‘Making Tax Digital: interest harmonisation and sanctions for late payment’ and was released on the same day as the consultation outcome, ‘Making Tax Digital: interest harmonisation and sanctions for late payment – summary of responses’.

The respondents were broadly in favour of the suggested changes, but as a result of comments made HMRC updated their proposals to ensure:

  • VAT repayment interest will accrue from the date that any other outstanding returns are submitted, subject to reasonable enquiry. Initially, it was suggested that no interest would be paid where there were other outstanding returns.
  • The date of contact with HMRC will be taken as the effective date for the purposes of when a time to pay agreement was put in place. Initially, it was suggested that penalties would only be reduced where the agreement was in place within the day limits specified, but this did not acknowledge the length of time it takes to finalise these agreements with HMRC.

The policy documents and draft legislation can be read in full here. The consultation response is here.

Small Print

Small print

The legislation is found in Schedule 56 FA 2009

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