HMRC Introduces New Points-Based Penalty System for UK Taxpayers
The Labour Party government and HMRC have announced a significant overhaul of late submission penalties, moving away from immediate £200 fines for UK households. Under the new Making Tax Digital system, a points-based approach will be implemented, offering more leniency for occasional errors.
How the New Points System Works
Instead of facing financial penalties straight away, taxpayers who miss a deadline will receive a penalty point. This means that a one-off mistake, such as submitting a quarterly update or tax return late, will not result in an immediate fine. Financial penalties will only be applied if deadlines are repeatedly missed.
HMRC explains: "When you reach a penalty points threshold, you’ll get a financial penalty." For those registered for VAT, penalty points for Income Tax Self Assessment are separate from VAT points, ensuring clarity across different tax obligations.
The 24-Month Rule and Compliance Period
A key feature of the new system is the 24-month rule. If a taxpayer has not reached the penalty point threshold, HMRC will automatically remove individual penalty points after 24 months. However, if the threshold is reached, action is required to reset points to zero.
This involves completing a period of compliance. For volunteers in the Making Tax Digital for Income Tax scheme, a 24-month compliance period is necessary, requiring the submission of the next two tax returns on time. Importantly, quarterly updates are not considered during this compliance period for volunteers.
Implications for Households and Volunteers
The changes mean that many people who miss just one deadline will avoid fines, receiving only a penalty point instead. This aims to reduce financial stress for households while encouraging better compliance over time. Additionally, volunteers using Making Tax Digital for Income Tax will face no late submission penalties for missing quarterly update deadlines, further supporting participation in the digital tax initiative.
HMRC emphasizes that this system is designed to be fairer, focusing on habitual non-compliance rather than punishing occasional lapses. As the new rules take effect, UK households can expect a more gradual approach to tax enforcement, with the 24-month rule providing a clear path to resetting penalty points and maintaining good standing.
