HMRC’s New Penalty Charge System (Effective April 2026): What Medium and Large Businesses Need to Know

From April 2026, HM Revenue & Customs (HMRC) will complete the rollout of its reformed penalty charge system for late tax submissions and payments. While these changes apply across the UK tax base, they are particularly relevant for medium and large businesses that manage multiple tax obligations, growing finance functions, and increasingly digital reporting requirements.

The reform is part of HMRC’s wider strategy to modernise tax administration, create consistency across penalty regimes, and support the expansion of Making Tax Digital (MTD). For medium‑to‑large organisations, the new framework places greater emphasis on process reliability, internal controls, and sustained compliance over time.

Key Changes to the Penalty Regime

1. Introduction of a Points‑Based System for Late Submissions

HMRC is moving away from automatic fixed penalties for every missed filing deadline. Instead, a penalty points system will apply to relevant taxes:

• Each late submission results in a penalty point, rather than an immediate financial fine.
• Once a defined points threshold is reached, a fixed monetary penalty (currently £200 per breach) is applied.
• Penalty points remain on record for up to two years and can only be cleared after a sustained period of full compliance.

This system already applies to VAT and will become increasingly important from April 2026 as more businesses fall within the scope of digital reporting obligations.

Official guidance: https://www.gov.uk/government/publications/penalties-for-late-submission/penalties-for-late-submission

2. Clear Separation of Submission and Payment Penalties

Under the reformed regime, HMRC distinguishes between:

• Late submission penalties (points and fixed charges), and
• Late payment penalties and interest.

Late payment penalties now escalate over time:

• No penalty if tax is paid within 15 days of the due date.
• An initial penalty applies between 16 and 30 days.
• Increased penalties and ongoing interest apply after 31 days.

For medium and large businesses, this structure reinforces the importance of accurate cash‑flow forecasting, treasury alignment, and prompt internal approvals.

Further details: https://www.gov.uk/government/publications/interest-harmonisation-and-penalties-for-late-submission-and-late-payment-of-tax

Why HMRC Is Reforming the System

HMRC has outlined several key objectives behind the penalty reforms:

• Fairness, by focusing penalties on repeated non‑compliance rather than isolated errors.
• Consistency, by aligning penalty rules across VAT, Income Tax, and other regimes.
• Modernisation, ensuring penalties reflect the realities of digital and more frequent reporting under Making Tax Digital.

For medium and large businesses, this signals HMRC’s expectation that organisations have appropriate systems, resources, and governance to meet ongoing compliance obligations.

How the Changes Affect Medium and Large Businesses

Greater Exposure Through Increased Filing Volumes

Medium and large businesses may manage:

• One or more VAT registrations,
• Quarterly or annual reporting cycles,
• Group or divisional finance structures, and
• Multiple stakeholders involved in the compliance process.

Each missed submission can generate penalty points, meaning that repeated minor delays across different returns may quickly lead to financial penalties.

Growing Importance of Governance and Oversight

As businesses scale, tax compliance increasingly intersects with:

• Internal risk management frameworks,
• Financial controls and sign‑off procedures,
• External audits and adviser oversight, and
• HMRC compliance reviews.

Penalty points provide HMRC with a clearer picture of ongoing compliance behaviour, which may influence future engagement and scrutiny.

Pressure on Processes as Digital Reporting Expands

As MTD requirements expand, reliance on manual processes becomes riskier. Late or incorrect submissions are easier for HMRC to identify, increasing the importance of robust, well‑documented reporting processes.

How Medium and Large Businesses Can Avoid Penalty Points

1. Review and Strengthen Compliance Processes

Ensure tax responsibilities are clearly defined, deadlines are monitored, and escalation procedures are in place if submissions are at risk.

2. Invest in Digital and MTD‑Compatible Systems

Adopt accounting and tax software that integrates with existing finance systems and supports accurate, timely submissions.

3. Monitor Penalty Point Exposure

Build regular reviews of penalty points into tax or finance reporting to identify trends and address issues before thresholds are breached.

4. Align Tax, Finance, and Treasury Teams

Close coordination between teams helps ensure both submissions and payments are made on time, reducing exposure to late payment penalties and interest.

5. Use Appeals and Reasonable Excuse Provisions Where Appropriate

If deadlines are missed due to genuine and exceptional circumstances, ensure evidence is retained and appeals are submitted promptly in line with HMRC guidance.

Conclusion

For medium and large businesses, HMRC’s April 2026 penalty reforms represent a shift towards a behaviour‑based compliance model. Organisations that invest in scalable systems, clear governance, and proactive monitoring will be best placed to minimise financial exposure and maintain a strong compliance profile as HMRC’s digital agenda continues to evolve.

How IMS Can Help

With HMRC’s reformed penalty regime coming into force from April 2026, having the right digital infrastructure in place is critical to avoiding late submissions, penalty points, and unnecessary compliance risk.

IMS is a HMRC-recognised software developer and provides a fully compliant Making Tax Digital solution designed for medium and large businesses. Unlike many alternatives, IMS’s platform does not rely on third-party software, giving organisations greater control, reliability, and security across their tax reporting processes.

IMS works with finance and tax teams to:

• Ensure seamless compliance with MTD requirements
• Reduce the risk of missed deadlines and penalty points
• Integrate digital tax reporting into existing business systems
• Support scalable, future-proof compliance as HMRC’s digital agenda evolves

To find out how IMS can help your organisation prepare for the April 2026 changes and strengthen its tax compliance framework, visit solutions@imsolutions.info or call 0845 130 8499 to speak to the IMS team about your MTD readiness.

Key HMRC Resources

• Penalties for late submission:
  https://www.gov.uk/government/publications/penalties-for-late-submission/penalties-for-late-submission
• Interest harmonisation and late payment penalties:
  https://www.gov.uk/government/publications/interest-harmonisation-and-penalties-for-late-submission-and-late-payment-of-tax
• Making Tax Digital and penalty reform (draft legislation):
  https://www.gov.uk/government/publications/making-tax-digital-for-income-tax-and-penalty-reform/draft-legislation-making-tax-digital-and-penalty-reform-accessible-version