Chancellor Rachel Reeves is set to increase the penalty fees for businesses and landlords submitting a tax return late in her Spring Statement this Wednesday.
She hopes the hikes will bring in an extra £1 billion a year to the Treasury by the end of the decade in a bid to close the UK’s estimated £40 billion gap between tax paid and tax owed.
From April 2025, the chancellor will increase late payment penalties for VAT and Making Tax Digital for Income Tax Self Assessment (ITSA).
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Those who file their VAT and ITSA returns late will have to pay a penalty of 3% of the tax owed if they are 15 days late in submitting their tax return, an increase of one percentage point.
If tax returns are submitted more than 31 days late, the penalty will jump to 10% of the outstanding balance – up from the current 4%.
The changes will particularly impact small businesses, who do not have the same resources as larger corporations to quickly and accurately file their tax returns.
HMRC said 1.1 million people missed the self-assessment tax return deadline in 2024, but criticism has been levied at the body for their poor customer service. In January, the Public Accounts Committee found nearly 44,000 telephone customers were cut off without warning after being on hold with HMRC for more than an hour last year.
Reeves will also employ more private debt collectors and HMRC staff to help collect tax that has been withheld.
She will task the new private debt collectors to retrieve £1.3 billion in tax income over the next five years, at a cost of £80 million to the taxpayer.
At the same time, HMRC will employ an additional 600 staff in their debt management teams as the Treasury hopes to recover £13 of debt for each £1 spent on the new hires.
Reeves will also announce £100 million in new funding for HMRC to recruit 500 more compliance officers.
The Chancellor said last week: “It is morally wrong that a minority of people continue to avoid paying the tax they owe to help fund our public services.
“At the Budget we announced the largest package to tackle unpaid tax in more than a decade to raise an additional £6.5 billion.
“Next week I will announce we will go further with a plan to raise an additional £1 billion to deliver on our Plan for Change.”
The crackdown on tax avoidance comes as the Chancellor tries to balance the books in her upcoming Spring Statement.
The statement is expected to include a series of budget cuts to public services, a reduction in red tape, and the implementation of cuts to disability benefits announced last week.
The possibility of cuts in public expenditure comes after almost all of the Chancellor’s fiscal headroom has been wiped out.
Economic growth predictions have also been gloomy, with The Telegraph reporting that the Office for Budget Responsibility (OBR) will halve its growth forecast following the Spring Statement.
How will tax return penalties change?
The late payment penalties for VAT and Making Tax Digital for Income Tax Self Assessment (ITSA) currently punish those who submit their tax returns 15 days late by charging 2% of the outstanding tax. Under the new rules, this will increase to 3%.
If any tax is still yet to be paid on the 30th day after the deadline, the 2% penalty increases to 4%. This will change to 6%.
If tax has still not been paid on the 31st day after the deadline, an additional penalty is charged every day at a rate of 4% per annum on all the outstanding tax. This will increase to 10%.
It is expected that the new rules will come into effect from April 2025 for VAT and 2026 for income tax.
Sole traders and landlords with incomes above £50,000 will join the scheme from April 2026.
This will reduce to £30,000 the year later, with those on incomes of more than £20,000 joining in April 2028.
