1. Why HMRC Changed the Rules
The old fixed-fine system (Finance Act 2009) penalised a first late return as harshly as repeated non-compliance. A first late return triggered an immediate £100 penalty even if no tax was owed. HMRC recognised this was unfair and counterproductive.
The reformed regime, rooted in the Finance Act 2021, is behaviour-focused: lenient with genuine one-off mistakes, progressively firmer with persistent ones. It went live for VAT in January 2023 and extended to Income Tax Self-Assessment (ITSA) under Making Tax Digital (MTD) from 6 April 2026.
2. How the New System Works
Late Filing: Points-Based Penalties
Each missed filing deadline adds one penalty point to your account. Hit the threshold and a £200 fixed fine is issued. Every further missed deadline adds another £200. Points only clear after two full years of unbroken compliance. Miss a single deadline in that window and the clock resets.
| Filer Type | Points Threshold | Fixed Fine |
|---|---|---|
| Quarterly filer (MTD ITSA) | 4 points | £200 |
| Monthly filer | 5 points | £200 |
| Annual filer | 2 points | £200 |
Late Payment: Tiered Charges
A short grace period applies before charges begin. After that, costs escalate in stages:
| Days Overdue | Charge Applied |
|---|---|
| 1 to 14 days | None (grace period) |
| Day 15 | 2% of unpaid tax |
| Day 30 | +2% further (total approx. 4%) |
| Day 31 onwards | 4% p.a. daily accrual, plus HMRC interest separately |
HMRC interest runs separately from the original due date at the Bank of England base rate plus 2.5 percentage points. It is not a penalty and cannot be appealed.
Who Does MTD ITSA Affect?
Directors with combined self-employment and property income above the thresholds below are mandated into MTD ITSA:
| From | Income Threshold |
|---|---|
| 6 April 2026 | Above £50,000 |
| 6 April 2027 | Above £30,000 |
| 6 April 2028 | Above £20,000 |
This applies on top of existing company tax obligations. Directors with rental portfolios or side businesses may already be in scope.
3. The Personal Risk for Directors
Personal Liability Notices (PLNs)
Limited liability does not protect directors when HMRC can demonstrate personal culpability. Under the Social Security Administration Act 1992 and the Value Added Tax Act 1994, HMRC can issue a Personal Liability Notice (PLN) to transfer unpaid PAYE, NIC, VAT, or CIS debt directly to the individual director where their fraud, neglect, or dishonesty caused the failure to pay. In 2026, PLNs are being deployed more aggressively than ever, alongside winding-up petitions and disqualification investigations.
HMRC Security Notices (Notices of Requirement)
Ignoring a Notice of Requirement is a criminal offence. Where HMRC believes future tax may go unpaid, it can demand a cash security deposit without warning. Most commonly triggered by: a history of late payments, association with previously failed companies, or phoenix activity. Directors who continue trading without providing security face prosecution and disqualification.
4. The Insolvency Connection
How Penalty Debt Triggers a Winding-Up Petition
HMRC is one of the most frequent petitioning creditors in England and Wales. Penalty charges build daily from day 31 alongside interest. Without a Time to Pay arrangement, escalation is swift:
- Statutory demand issued, giving 21 days to respond
- Winding-up petition presented in the Insolvency and Companies Court
- Petition advertised in the London Gazette; bank accounts are typically frozen immediately
- Compulsory liquidation; the Official Receiver investigates all directors
The March 2026 Insolvency Service Proposals
The Insolvency Service consultation (25 March 2026, closing 17 June 2026) proposes the most significant enforcement reform in 40 years:
- New disqualification ground for failing to comply with HMRC security notices
- A Director Restrictions regime: conduct restrictions applicable to directors of live, solvent companies
- Mandatory disqualification following public interest winding-ups
- Expanded powers to investigate misconduct in solvent and dissolved companies
- Limitation period for certain investigations extended from three to five years
5. Five Actions Directors Should Take Now
| Action | Why It Matters |
|---|---|
| Register for MTD ITSA if income exceeds £50,000 | Mandatory from April 2026. Non-registration does not avoid penalties |
| Pay within the grace period (15 days; 30 days in 2026/27) | Eliminates late payment penalties entirely |
| Request Time to Pay proactively if cash flow is tight | A TTP stops penalty charges running. Breaking one triggers retrospective penalties |
| Do not ignore penalty point notices | Two years of full compliance needed to clear points. One miss resets the clock |
| Act within 21 to 31 days on any HMRC formal notice | Missing this window removes the right to appeal |
6. A Note From Us
We see the same pattern repeatedly. A business falls behind on tax, often for understandable reasons. The director assumes there is time. Penalty charges compound quietly. A winding-up petition then arrives faster than expected and the options narrow sharply.
The 2026 reforms accelerate that sequence. The proposed Insolvency Service changes mean personal consequences can arrive before insolvency, from a wider range of conduct than ever before. The options available to a distressed business are broadest when advice is taken early.
- Company Voluntary Arrangement (CVA): restructure tax debts while keeping the business trading
- Administration: court protection from creditor action while a rescue plan is formed
- Time to Pay with HMRC: frequently granted when requested before enforcement begins
- Creditors’ Voluntary Liquidation (CVL): an orderly wind-down that limits directors’ personal exposure
