What has changed under HMRC’s new penalty regime?
HMRC has introduced a revised penalty framework as part of the Making Tax Digital rollout, extending it to income tax. The most notable change is the move away from immediate financial penalties for missed deadlines.
Instead, the system now operates on a points-based model for late submissions.
- Points are issued when deadlines are missed, and only once a threshold is reached does a financial penalty apply.
- Alongside this, a separate structure applies to late payment of tax, with penalties increasing over time depending on how long the liability remains outstanding.
The overall aim is to create a more consistent and structured approach to compliance across different taxes.
Who is affected by the extension to income tax?
The updated regime applies to a wider group than before. It now includes individuals and businesses brought within the Making Tax Digital framework for income tax.
For many, this means more frequent reporting obligations and a greater emphasis on maintaining accurate, up to date digital records. The change is not just administrative. It reflects HMRC’s broader move towards closer, ongoing monitoring of tax compliance.
How do the new penalties work in practice?
The new structure is designed to distinguish between occasional errors and repeated non-compliance.
A single missed deadline will not usually trigger an immediate financial penalty. However, repeated failures will build into a position where penalties are applied and may continue to escalate if the underlying issue is not resolved.
For late payment, the position is more direct. The longer a tax liability remains unpaid, the greater the penalty exposure becomes. This creates a clear incentive to address outstanding liabilities at an early stage.
When can penalties lead to wider HMRC action?
Although the revised system is intended to be proportionate, it also gives HMRC greater visibility of taxpayer behaviour over time.
Repeated missed deadlines or ongoing late payment can indicate deeper issues. In practice, this can lead to further scrutiny and, in some cases, a formal HMRC enquiry. Once matters reach that stage, the focus often shifts from simple compliance to a broader review of a business’s tax position.
Where concerns arise, issues can develop into disputes that require careful handling, particularly if HMRC begins to question the accuracy of filings or the way in which records have been maintained.
What steps can businesses take to reduce risk?
The key to managing exposure under the new regime is consistency and early action. Businesses should ensure that their systems and processes are aligned with Making Tax Digital requirements and that deadlines are monitored carefully.
If problems begin to emerge, it is important to address them before they accumulate into a wider issue. In practical terms, this means:
- keeping digital records accurate and up to date
- meeting reporting deadlines wherever possible
- engaging early if there are difficulties with payment or compliance
Taking these steps reduces the risk of penalties building over time and helps avoid escalation into more serious HMRC action.
