The New Penalty Regime: Points-Based Late Filing And Percentage-Based Late Payment Penalties

If you file VAT returns, you're already on a new penalty system that works completely differently from the old one. If you're self-employed or have property income over £50,000, you're about to join it from April 2026.

And there's something most people don't know: in May 2025, the daily late payment penalty rate more than doubled—from 4% to 10% per annum—and the initial penalties increased from 2% to 3% at each stage. Combined with the rollout to income tax, the new regime is expanding in scope and increasing in severity at the same time.

Here's how the system works, what the tribunal has already decided in the first wave of cases, and the one thing you can do that prevents late payment penalties entirely.

Who Is On The New Regime

VAT (From 1 January 2023)

All VAT-registered businesses moved to the new regime on 1 January 2023, brought into force by SI 2022/1278. If you've been filing VAT returns since then, you're already on this system—and you may already have penalty points without realising it.

Each time HMRC awards a penalty point, it sends a "penalty point notification" letter. If you reach the threshold and trigger a £200 penalty, you receive a separate penalty assessment. Check for these in your post and in your Business Tax Account online—penalty point notifications are easy to overlook, especially if an agent handles your correspondence.

Income Tax Self Assessment (From April 2026)

The new regime extends to income tax as part of Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA). The rollout is phased by income:

"Qualifying income" means your total annual income from self-employment and property combined. The £20,000 threshold for 2028-29 is subject to further legislation.

First-year grace period: GOV.UK confirms that HMRC will not apply penalty points for late quarterly updates during the first tax year (2026-27). However, penalties will still apply from day one for late annual tax returns and late payment of tax. The grace period covers quarterly updates only.

Who Stays On The Old Regime

Not everyone moves. As of March 2026, the following remain on the old penalty regime under Schedules 55 and 56 of the Finance Act 2009:

• Self Assessment filers not yet mandated into MTD for ITSA (income under £50,000)
• Corporation tax, PAYE RTI, and CIS returns

If you're on the old regime, see our Self Assessment penalties guide.

Separate Registers

VAT and ITSA penalty points are maintained on separate registers. If you run a VAT-registered business and also file under MTD for ITSA, you'll have two independent tallies. Within ITSA, quarterly updates, end-of-period statements, and the annual "final declaration" are also in separate groups—each accumulates points independently.

Existing penalties under the old regime don't convert to points. When you move to the new regime, you start at zero.

Late Submission Penalties: How The Points System Works

The new late filing regime is set out in Schedule 24 of the Finance Act 2021. Instead of an immediate financial penalty for a single late return, it uses a points system—like penalty points on a driving licence.

Points Per Failure

Each time you submit a return late, HMRC awards one penalty point. Points accumulate until you reach a threshold based on your filing frequency:

You can't receive more than one penalty point per month for any single group of returns.

The £200 Penalty

Once you reach the threshold, a £200 financial penalty is triggered under paragraph 15 of Schedule 24. Every subsequent late submission while you're at or above the threshold also triggers a £200 penalty. HMRC sends a penalty assessment notice—you have 30 days from the date of the notice to pay or to appeal.

For quarterly filers, this means the first three late returns earn points with no financial penalty. The fourth late return hits the threshold—and from then on, each late return costs £200.

How Points Expire

Points don't last forever, but the rules for clearing them depend on whether you're below or at the maximum:

Below the threshold: Individual points expire 24 months after the first day of the month following the failure (paragraph 7). So if you miss one quarterly return but file on time from then on, that point disappears after two years.

At the threshold: Points don't expire automatically. To reset all your points to zero, you must meet both conditions simultaneously (paragraph 8):

1. File every return on time for the "relevant length of time": 24 months for annual filers, 12 months for quarterly, 6 months for monthly.
2. Submit all outstanding returns from the past 24 months—even if late.

Until both conditions are met, your points stay at the maximum and every late submission triggers another £200 penalty.

Worked Example: Quarterly VAT Filer

You file quarterly VAT returns and miss four returns over an 18-month period:

After hitting 4 points, every subsequent late filing triggers a £200 penalty. To reset, you'd need 12 consecutive months of on-time filing and all outstanding returns submitted.

No Special Reduction

This is an important difference from the old regime. Schedule 24 does not include a "special reduction" power for late submission penalties. The only defence is reasonable excuse. If you can't show a reasonable excuse, the penalty point and any resulting £200 penalty stand. HMRC has no discretion to reduce them for special circumstances.

Late Payment Penalties: The 15-Day Clock

The new late payment regime is set out in Schedule 26 of the Finance Act 2021. It replaced the old three-stage system (5% at 30 days, 6 months, 12 months) with a structure that starts sooner and accrues daily.

The Grace Period

No penalty is charged if you pay in full within 15 days of the due date, or if you have a Time to Pay (TTP) agreement in place before that 15-day deadline (paragraph 4, Schedule 26). This is shorter than the old regime's 30-day grace period.

First Penalty: 3% + 3%

If tax remains unpaid after the grace period, the first penalty is calculated in two parts under paragraph 5 of Schedule 26:

• Amount A: 3% of the tax still unpaid at the end of day 15
• Amount B: 3% of the tax still unpaid at the end of day 30

If you pay between day 16 and day 30, you owe Amount A only (3%). If you're still unpaid at day 31, you owe both—a maximum first penalty of 6% of the unpaid tax.

A TTP agreement reached before day 31 prevents Amount B from being charged.

Second Penalty: 10% Per Annum

From day 31, a second penalty begins accruing daily under paragraph 8 of Schedule 26. The rate is 10% per annum on the outstanding balance, calculated and charged daily until you pay in full.

If you enter a TTP agreement, the daily accrual is suspended for the duration of the arrangement (paragraph 8(5)-(6)). But if you break the TTP, HMRC can charge the second penalty as if the agreement never existed (paragraph 9).

The May 2025 Rate Increase

The rates above are the current rates, in force since 31 May 2025 following SI 2025/589. Before that date, the rates were significantly lower:

The daily accrual rate more than doubled. That's the change most people haven't noticed.

Transitional rules: The increased rates do not apply to income tax or CGT for tax year 2024-25 or earlier, and do not apply to VAT for accounting periods beginning before 1 April 2025. If you're being charged a late payment penalty for an older period, check which rates should apply.

Worked Example: £10,000 Unpaid For 90 Days

You owe £10,000 in VAT for a period beginning after 1 April 2025. The payment was due on 7 August 2025 and you pay nothing until day 90 (4 November 2025).

• Day 15 (Amount A): 3% of £10,000 = £300
• Day 30 (Amount B): 3% of £10,000 = £300
• Days 31-90 (second penalty): 10% p.a. on £10,000 for 60 days = £10,000 x 10% x 60/365 = £164.38
• Total penalties: £764.38

On top of this, HMRC charges late payment interest at 7.75% per annum (Bank of England base rate + 4%), which runs from the original due date until payment. Interest is separate from penalties and cannot be appealed.

Under the old regime, the same £10,000 unpaid for 90 days would have triggered a single 5% penalty at day 30 = £500. The new regime produces a higher total—and the gap widens the longer you leave it, because of the 10% daily accrual.

Time To Pay Prevents All Late Payment Penalties

If there is one thing to take away from this article, it's this: a Time to Pay agreement made before day 15 prevents all late payment penalties. Even a TTP agreed before day 31 limits the damage by preventing Amount B and suspending the daily accrual.

The legislation is explicit. Paragraph 4 of Schedule 26 provides that no penalty arises where the "15-day time-to-pay condition" is met. Contact HMRC as soon as you know you can't pay on time—call 0300 200 3831 for VAT or 0300 200 3820 for Self Assessment.

You don't need a complete payment plan before you call. Starting the conversation before the deadline is what matters.

Old Regime vs New Regime: Side By Side

For a detailed guide to the old regime, see our penalties overview and SA penalties guide.

Who benefits? First-time late filers. Under the old regime, a single late SA return triggered an automatic £100. Under the new regime, you just get a point.

Who is worse off? Persistent late payers. The old regime capped penalties at 15% after 12 months. The new regime's 6% first penalty plus 10% p.a. daily accrual exceeds 15% well before the 12-month mark—and keeps growing.

Challenging A Penalty Under The New Regime

Reasonable Excuse

Both the points-based late submission penalties (paragraph 19, Schedule 24) and the late payment penalties (paragraph 12, Schedule 26) can be cancelled if you had a reasonable excuse for the failure. The test is the same as under the old regime—the four-step Perrin test applies.

Both schedules explicitly state that insufficiency of funds is not a reasonable excuse unless attributable to events outside your control, and reliance on another person is not a reasonable excuse unless you took reasonable care to avoid the failure. For a full guide, see our reasonable excuse article.

What The Tribunal Has Already Decided

The First-tier Tribunal has now decided multiple cases under the new regime. Here's what the early case law shows.

Krywald v HMRC [2024] UKFTT 895 (TC) — Appeal allowed. A sole-practitioner solicitor relied on bookkeepers who provided inaccurate figures after COVID-related disruption, and HMRC gave incorrect advice about what was needed to submit VAT returns. The tribunal found reasonable excuse: the bookkeeper had been reliable before COVID, the appellant pursued the firm to fix errors, and HMRC's own incorrect guidance was a significant factor. The tribunal also found that HMRC's refusal to reduce late payment penalties for special circumstances was flawed, because HMRC gave no reasons for rejecting the claim—meaning penalties would have been reduced to zero on that basis as well.

ESC Studios Ltd v HMRC [2025] UKFTT 747 (TC) — Appeal allowed. A film company couldn't pay £225,000 in VAT because HMRC was withholding a £479,000 repayment for an earlier period. The tribunal applied the Steptoe principle—the reason for an insufficiency of funds can itself be a reasonable excuse—and found the company had taken every reasonable step to resolve the situation. Late payment penalty of £9,025 cancelled.

DDK Projects Ltd v HMRC [2025] UKFTT 1251 (TC) — Appeal allowed. A director's partner had a traumatic emergency Caesarean during the critical payment window. The company had the funds—£629,000—but the payment couldn't be authorised while the director was caring for his family. Reasonable excuse found.

Five Star (Development) Homes Ltd v HMRC [2025] UKFTT 1255 (TC) — Appeal dismissed. A company had 17 consecutive late monthly VAT filings. The managing director (81) had delegated to an untrained granddaughter using accounting software that required monthly payment to complete submissions. 5 penalty points plus 12 x £200 penalties = £2,400. The tribunal held that software glitches require verification systems—you can't simply assume filing happened—and that an employer is responsible for supervising employees who handle tax filing.

Luzha v HMRC [2026] UKFTT 320 (TC) — Appeal dismissed. A sole trader relied on an accountant who didn't file quarterly VAT returns, then switched to software and had difficulties. The tribunal explicitly applied the Perrin four-step test and held that simply assuming an accountant would file—without taking any steps to verify—does not satisfy the "reasonable care" requirement.

Splend SPV (UK) Ltd v HMRC [2026] UKFTT 232 (TC) — Appeal dismissed. A company argued it couldn't pay £534,000 in VAT because HMRC owed its associate company a larger amount. The tribunal found that delayed repayments for later periods can't have caused inability to pay VAT that was already due—and associate company refunds are irrelevant unless a VAT group is in place.

The patterns from early case law:

• Incorrect HMRC advice can be a powerful factor supporting reasonable excuse (Krywald)
• HMRC withholding your own money can excuse late payment (ESC Studios)
• Genuine personal emergencies work, even for large amounts (DDK Projects)
• Relying on agents or software without verification fails (Five Star, Luzha)
• Associate company debts don't excuse your own VAT liability (Splend)
• Contact HMRC before the deadline, not after

Special Reduction (Late Payment Only)

Paragraph 13 of Schedule 26 gives HMRC a discretionary power to reduce a late payment penalty for "special circumstances." Ability to pay and the fact that an overpayment might balance the debt are explicitly excluded. To request a special reduction, write to HMRC setting out what you say the special circumstances are, or raise it as part of your appeal to the tribunal.

If HMRC refuses, the tribunal reviews that decision on a judicial review standard (paragraph 21(3)-(4))—it asks whether HMRC's decision was "flawed," not whether the tribunal would have decided differently.

In ESC Studios, the tribunal found HMRC's refusal flawed because HMRC had failed to consider that it was holding £500,000 belonging to the company while penalising it for not paying £225,000. In Krywald, the refusal was flawed because HMRC gave no reasons for rejecting special circumstances at all.

Remember: special reduction is available for late payment penalties only. There is no equivalent power for late submission penalty points or the £200 penalties.

How To Appeal

The appeal process is the same as for any HMRC penalty:

1. Note the deadline. You have 30 days from the penalty notice to appeal. If you've already missed it, see our late appeal guide.

2. Request an HMRC review or appeal directly. You can ask HMRC to review the decision—a different officer looks at your case within 45 days. Or appeal directly to the First-tier Tribunal. See understanding your appeal rights.

3. Appeal to the tribunal. There is no fee to appeal. Our step-by-step guide walks you through the process. Most penalty appeals are allocated to the Default Paper or Basic category—limited paperwork, no costs risk. You don't normally pay the penalty while an appeal is pending.

4. Set out your grounds. Our guide to writing your grounds of appeal covers how to structure your case.

MTD For Income Tax: What To Expect From April 2026

If your combined self-employment and property income exceeds £50,000, you must sign up for MTD for Income Tax through your Government Gateway account and use MTD-compatible software to keep digital records and send quarterly updates from 6 April 2026. Sign-up is not automatic—you need to register yourself (or have your agent do it). Here are the quarterly deadlines:

A calendar quarter option (1 April to 30 June, etc.) is also available, with the same deadlines.

The annual return still applies. The quarterly updates don't replace the annual tax return—now called the "final declaration"—which remains due by 31 January following the end of the tax year. The quarterly updates are in addition to this.

The first-year grace period covers quarterly updates only. During 2026-27, HMRC will not apply penalty points for late quarterly updates. But late return penalties and late payment penalties apply from day one. Don't mistake the quarterly grace period for blanket protection.

After the grace period, each late quarterly update earns a penalty point. As a quarterly filer, you hit the 4-point threshold—and the £200 penalty—after four late submissions.

Practical Checklist

• Set calendar reminders for every filing deadline. Quarterly filers have four submission deadlines plus the annual return. Missing one is a point; missing four is money.

• If you can't pay on time, contact HMRC before day 15. A Time to Pay agreement before the 15-day deadline prevents all late payment penalties. Contact HMRC to set one up—call 0300 200 3831 for VAT or 0300 200 3820 for Self Assessment.

• Check your penalty points. VAT-registered businesses can see their current points tally in their online VAT account. Don't wait until a £200 penalty notice arrives.

• Don't ignore penalty point notices. In Five Star, penalty notices went unacted upon for months because an employee hid them from the director. By the time the problem was discovered, 12 x £200 penalties had stacked up.

• Verify that returns were actually filed. Software doesn't always complete the job. Check for confirmation from HMRC that each return was received. If using an agent, verify—don't just assume.

• Keep records of anything that might be a reasonable excuse. Illness, bereavement, HMRC error, a system outage—document it at the time. Contemporaneous records carry far more weight than after-the-fact explanations.

• Remember that interest runs separately. Late payment interest at 7.75% (Bank of England base rate + 4%) accrues on top of penalties from the original due date. It cannot be appealed.

• Review your overall position. For a complete map of how penalties fit into the broader dispute process, see our tax dispute timeline.

Key Legislation And Resources

Legislation:

• Schedule 24, Finance Act 2021 — late submission penalties (points-based)
• Schedule 26, Finance Act 2021 — late payment penalties (percentage-based)
• Schedule 55, Finance Act 2009 — old late filing penalties (SA, CT, PAYE)
• Schedule 56, Finance Act 2009 — old late payment penalties
• SI 2025/589 — May 2025 rate increase for late payment penalties

GOV.UK guidance:

• Penalties for late submission — HMRC's guidance on the points-based regime
• Penalties for late payment — HMRC's guidance on percentage-based penalties
• Sign up for Making Tax Digital for Income Tax — MTD ITSA rollout and first-year grace period

Key cases:

• Krywald v HMRC [2024] UKFTT 895 (TC) — HMRC incorrect advice as reasonable excuse
• ESC Studios Ltd v HMRC [2025] UKFTT 747 (TC) — HMRC withholding repayment; Steptoe principle
• DDK Projects Ltd v HMRC [2025] UKFTT 1251 (TC) — personal emergency during payment window
• Five Star (Development) Homes Ltd v HMRC [2025] UKFTT 1255 (TC) — delegation without verification
• Luzha v HMRC [2026] UKFTT 320 (TC) — reliance on accountant without oversight
• Splend SPV (UK) Ltd v HMRC [2026] UKFTT 232 (TC) — associate company refunds not relevant

On this site:

• HMRC penalties explained — old regime overview
• Self-assessment penalties — SA-specific penalties under the old regime
• What is a reasonable excuse? — the key defence
• Perrin v HMRC: the four-step test — landmark reasonable excuse case
• How to appeal to the tax tribunal — step-by-step filing guide
• HMRC internal review — the free review step
• Late appeals to the tax tribunal — missed the deadline?
• Tribunal tracks and costs — case categories and costs regime
• Writing grounds of appeal — structuring your case
• The tax dispute timeline — complete roadmap

This article is for informational purposes only and does not constitute legal or tax advice. For advice specific to your situation, consult a qualified tax adviser, accountant, or solicitor.