The regulations have been updated to increase the penalties for late payment of tax in Schedule 26 to the Finance Act (FA 2021).
These regulations are made to:
- Amend the Financial Act 2021, Schedule 26 by increasing penalty percentages for the late payment of tax
- Exclude application to Income Tax and Capital Gains Tax (CGT) for tax year 2024/25 and earlier
- Exclude application to VAT for prescribed accounting periods beginning before 1st April 2025 or assessed under section 80 (4A) or 80B of the Value Added Tax Act 1994 for periods beginning before that date
The regulations were announced on 16th May and came into effect on 31st May 2025.
What is the purpose of the updates?
The regulations are part of a broader Finance Act 2021 and aim to enhance compliance by increasing the financial penalties for late tax payments.
The penalty for failing to pay the tax due has been increased from 4% to 10% of the outstanding tax per annum.
How will taxes be affected?
The new penalty rates apply to failures to pay tax due on or after 31st May 2025, with some expectations for income tax, Capital Gains Tax (CGT) and VAT related to earlier periods.
For VAT, the new penalties apply unless the tax is payable by reference to a prescribed accounting period that began before 1st April 2025.
Exceptions
There are exceptions for both VAT and Income Tax:
VAT – The increased penalty rates do not apply to VAT that is payable by reference to a prescribed accounting period that began before 1st April 2025. Additionally, the increased penalties do not apply to VAT that has been assessed under section 80 (4a) or 80b of the Value Added Tax Act 1994 (the recovery of excess credit) in relation to VAT.
Income Tax – The increased penalty rates do not apply to income tax or Capital Gains Tax that is payable in respect of the tax year 2024-25 or any earlier tax year.
These exceptions ensure that the new penalty rates are only applied to tax liabilities arising from more recent periods, providing a clear cut-off for the application of the increased penalties.
How we can help
The increase in penalties makes it even more important for businesses to ensure that tax reporting processes and procedures are robust as getting it wrong will be even more costly.
Get in touch with a member of our team today if you have any questions about the updated regulations or would like to discuss options for a tailored review of existing tax reporting functions.
