CIOT suggests improvements to late-payment penalties

The CIOT and LITRG have proposed changes to draft regulations which would allow HMRC to issue the second late-payment penalty where the outstanding tax has not been paid in full by the end of the two-year assessment limit.

HMRC had been consulting on draft regulations (the draft Penalties for Failure to Pay Tax (Schedule 26 to the Finance Act 2021) (Assessments) Regulations 2024) which would update the late-payment penalty rules under the harmonised penalties regime (currently in force only for VAT and the voluntary phase of MTD for income tax self-assessment). 

Under the existing rules, taxpayers could potentially avoid the second of the two late-payment penalties (the penalty for tax outstanding after 30 days) by not paying the tax before the end of the two-year time limit. The draft regulations aim to remove that unintentional consequence by enabling HMRC to raise the second penalty within the two-year period where the tax has not at that point been paid. 

This creates a difficulty because, given the tax has not been paid, it is not at this point possible to work out the amount of the penalty. The regulations would therefore still not allow HMRC to issue a penalty assessment. In response, the CIOT and LITRG suggest suggest that HMRC should instead be able either to estimate the penalty or to assess the penalty based on part of the penalty period.

The rules could also be updated to allow HMRC to issue a supplementary assessment for any additional amount of penalty when the tax is eventually paid.

The CIOT also highlights a potential loophole where a time to pay agreement is in place which prevents HMRC from assessing the second penalty within the two-year period, suggesting that clarification is needed on that point.