Draft Finance Act 2021 (Increase in Schedule 26 Penalty Percentages) Regulations 2025

The Committee consisted of the following Members:

Chair: † Carolyn Harris

† Arthur, Dr Scott (Edinburgh South West) (Lab)

† Barron, Lee (Corby and East Northamptonshire) (Lab)

† Chamberlain, Wendy (North East Fife) (LD)

† Davies, Gareth (Grantham and Bourne) (Con)

† Dollimore, Helena (Hastings and Rye) (Lab/Co-op)

† Khan, Naushabah (Gillingham and Rainham) (Lab)

† McEvoy, Lola (Darlington) (Lab)

† Murray, James (Exchequer Secretary to the Treasury)

† Pinto-Duschinsky, David (Hendon) (Lab)

† Powell, Joe (Kensington and Bayswater) (Lab)

† Slinger, John (Rugby) (Lab)

† Stephenson, Blake (Mid Bedfordshire) (Con)

† Strathern, Alistair (Hitchin) (Lab)

† Thomas, Bradley (Bromsgrove) (Con)

† Wakeford, Christian (Bury South) (Lab)

† Wild, James (North West Norfolk) (Con)

Seb Newman and Emma Elson, Committee Clerks

† attended the Committee

First Delegated Legislation Committee

[Carolyn Harris in the Chair]

Draft Finance Act 2021 (Increase in Schedule 26 Penalty Percentages) Regulations 2025

I beg to move,

That the Committee has considered the draft Finance Act 2021 (Increase in Schedule 26 Penalty Percentages) Regulations 2025.

It is a pleasure to serve on this Committee with you as Chair, Mrs Harris. These draft regulations increase the penalties charged for the late payment of certain taxes. They do so by amending the percentage points by which the late-paid tax is multiplied in order to calculate the penalties. The taxpayers affected are those paying VAT, income tax or capital gains tax under Making Tax Digital for income tax.

The reform of penalties by His Majesty’s Revenue and Customs intends to modernise the tax system in relation to late payment penalties, as set out in schedule 26 of the Finance Act 2021, incentivising compliance and protecting the public finances. At this stage, the legislation affects only VAT customers for accounting periods beginning on or after 1 January 2023, and those who have voluntarily joined Making Tax Digital for income tax since April 2024. It is, however, the intention over time for penalty reform to replace other late filing and late payment penalties. The effect of the draft regulations will be to increase the late payment penalties for those who do not pay on time. They will change from two percentage points at days 15 and 30, and four percentage points after 30 days, to three, three and 10 percentage points respectively.

The reason that we are pursuing these changes is as part of a Government package to bring down the debt balance. We inherited a debt balance of more than £44 billion in March 2024—more than double the £19 billion in March 2019 before the pandemic—and we are determined to use all levers at our disposal to reduce it. We know that unpaid tax deprives public services of vital funding, and puts businesses that pay the right tax at a competitive disadvantage. Closing the tax gap plays a key part in the Government’s efforts to restore economic stability and fiscal responsibility.

Let me be clear to Committee members that these changes to late payment penalties do not affect compliant taxpayers who pay their tax on time. This approach continues to encourage taxpayers to pay what they owe on time, while providing a greater disincentive for those taxpayers who are continuously non-compliant, do not engage with HMRC and still owe tax after 30 days. It therefore removes any unfair financial advantage for those who choose not to pay over compliant taxpayers who pay on time. We believe that an increase in these penalties will be an important step in closing the tax gap and encouraging those who owe tax into compliance.

It is a great pleasure to be here, Mrs Harris. This is a relatively straightforward instrument, and I am grateful to the Minister for setting out its detail.

Tackling the tax gap is critical, and I am pleased that, between 2010 and 2024—just to pick two years at random —the tax gap reduced from 6.2% to 4.8%. It is vital that we go further and do everything that we can to reduce that tax gap. The Finance Act 2021 introduced a new penalty regime for late submissions of returns and for late payment of tax. By revising minor parts of that Act, these regulations impose harsher penalties on the amount of tax outstanding for those paying VAT and those paying under Making Tax Digital for income tax self-assessment.

As I said, we will not oppose the measure, but I have a couple of questions for the Minister. First, what efforts is he making to improve HMRC customer services to help support taxpayers who are just seeking to do the right thing? Secondly, what communications will accompany the changes to further encourage compliance and bring down the tax gap even further, which is what we all want?

It is a pleasure to serve under your chairmanship, Mrs Harris. I want to take a short period of time—much shorter than the time that many of our constituents wait to get through to HMRC—to echo the remarks of the shadow Minister, the hon. Member for Grantham and Bourne. HMRC plays a crucial role in the tax system, but recent statistics show significant challenges in its customer service. I am aware of constituents who wish that they could give up waiting on the phone line, but they know that if they do, penalties are potentially waiting for them. Although what we are debating here is limited in its changes, it is a challenge.

I want to cite briefly a statistic from the 2022-23 tax year: taxpayers collectively spent over 7 million hours—equivalent to almost 800 years—on hold to HMRC. In 2023-24, only two thirds of calls to HMRC were actually answered by advisers, falling far short of the 85% target. I note the limitations of the changes, but my question, in addition to those of the shadow Minister, is whether an inability to get through to HMRC will be considered a reasonable excuse for not paying fines.

I welcome the Opposition’s support for the draft regulations. The hon. Members for Grantham and Bourne and for North East Fife asked about wider efforts to improve HMRC’s service. I will address that briefly, although I realise that it strays a little beyond the strict boundaries of the regulations, but they are very important questions.

As Members might know, when I became Exchequer Secretary to the Treasury and chair of HMRC’s board, I set out our three priorities for HMRC: close the tax gap, improve customer service and reform and modernise HMRC. In fact, they all come together around measures such as these changes to late payment penalties, because we need to make sure that we close the tax gap, modernise the service and improve the service that individual taxpayers and businesses receive.

We are in the process of going through the spending review. We will publish a transformation road map after that has concluded, which will set out our plans to improve HMRC’s service. The answer to extended waiting times on the phones cannot simply be to recruit more people to pick up the phones; it has to be to reform the way that HMRC services are delivered. More needs to be done through automation and self-service, with tax being paid without people even having to engage with the system by picking up a phone, because it will happen in a more automated fashion. When they need help, they should be able to get it online rather than having to pick up a phone, so there is a lot of progress there. If Opposition Members want to talk to me about that in future, they are welcome to grab a moment in the Division Lobbies, although we are usually in different ones.

The draft regulations will give effect to the Government’s specific decision around the late payment penalties that I set out. It is important to emphasise, because the theme of customer service and supporting individual taxpayers has been raised by other Members, that the Government are encouraging taxpayers facing genuine difficulty to contact HMRC to enter a time to pay arrangement. As I mentioned, that enables taxpayers to pay by instalments over a longer time period.