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NB: “»Ê¹ÚÌåÓýappse rules currently only apply to VAT, for VAT periods starting on or after 1 January 2023. »Ê¹ÚÌåÓýappse rules will come into force for other tax regimes at a future date. You must check the date from which these rules apply for the tax or duty you are dealing withâ€�

All customers are expected to make payment in full by the due date. If a person is unable to pay by the due date, they can ask HMRC to agree a Time to Pay agreement (TTP).

A (TTP) agreement is an agreement between HMRC and a person that allows an amount of tax due to be paid in instalments.

If a TTP is agreed, this stops late payment penalties applying from the date the proposals for paying the tax were made by the person. For example, no penalty would be payable if the proposals were made by the end of the 15-day period.

If the proposals were made after the 15-day period, the amount of the first penalty will depend on whether the proposals were made before or after the end of the 30-day period.Ìý

If the proposals were made no later than day 30, the first penalty would be limited to the 3% first penalty arising at the end of day 15. If TTP is agreed after day 30 the first penalty would be 3% of what was outstanding at day 15 plusÌý3% of what is still outstanding at day 30.

A second penalty would only be applied if the TTP proposals were made on or after day 31.

Where a TTP is varied the rules still apply to the varied TTP as if it was the original agreement.

Example- TTP arrangement agreed and kept

Customer submitted a VAT return showing that they owed £1,000 VAT. »Ê¹ÚÌåÓýappy did not pay any of the VAT by the 30 day after the payment due date so incurred a first late payment penalty of £60 (3% x £1,000 owed at the 15 day + 3% x £1,000 owed at the 30 day).ÌýÌý

»Ê¹ÚÌåÓýappy have still not paid by the 40 day after the payment due date so has also incurred a second late payment penalty at a rate equivalent to 10% per year. »Ê¹ÚÌåÓýappy approach HMRC on the 40 day and agree a schedule for paying off their debt as part of a Time to Pay arrangement.Ìý

By proposing a TTP arrangement, they stop the second late payment penalty accruing further.Ìý

»Ê¹ÚÌåÓýappy pay the full amount of VAT under the terms of the TTP agreement. »Ê¹ÚÌåÓýapp second late payment penalty is calculated from the 31 day after the payment due date to the day the proposal was made (the 40 day).ÌýÌý

Breaking a TTP

If the person breaks the terms of a TTP agreement, HMRC may cancel that agreement and notify them that a penalty is payable. When this happens the liability for both the first penalty and second penalty will be calculated as if the TTP never had effect.

A TTP agreement is broken if:

• the person fails to pay the deferred amount when the deferral period ends, or
• the deferral is subject to the person complying with a condition and the person fails to comply with it.

Example â€� TTP arrangement brokenÌý

Customer owes £1,000 VAT. On the 40 day after the payment due date they propose a TTP arrangement that is agreed by HMRC. »Ê¹ÚÌåÓýappy have already been charged a first late payment penalty of £60 because the VAT was not paid by the end of the 30 day.Ìý

Under the TTP arrangement they agree to pay £167 each month for 6 months until the £1,000 debt is paid.ÌýÌý

Customer pays the first two monthsâ€� instalments on time but does make any payment for the 3 month. This breaks the TTP arrangement.Ìý

Customer eventually pays the remaining £666 on the 101 day after the payment due date.Ìý

»Ê¹ÚÌåÓýapp first late payment penalty of £60 still applies, as nothing was paid within 30 days of the payment due date.Ìý

Because Customer broke the TTP arrangement, HMRC charges the second late payment penalty as if the TTP arrangement was never in place. »Ê¹ÚÌåÓýapp calculation of the second late payment penalty reflects the actual amounts outstanding until it was paid.Ìý

Calculation:Ìý

£1,000 outstanding for 10 days (31 to 40 days): £1,000 x 10% x 10/365 = £2.73

plusÌý

£167 paid on day 40 so £833 outstanding for 30 days (41 to 70 days): £833 x 10% x 30/365 = £6.84ÌýÌý

plus

£167 paid on day 70 so £666 outstanding for 32 days (71 to 101 days): £666 x 10% x 32/365 = £5.83

Second late payment penalty = £2.73 + £6.84 + £5.83 = £15.40Ìý

FA21/SCH26/PARA10(4-6)