HMRC are bringing in line the way late penalties and interest are calculated across all taxes. This will result in some changes to the VAT penalty system for VAT return periods starting from 1 January 2023 onwards.
The old VAT default surcharge regime has been replaced by a new penalty system with separate penalties for late submission of VAT returns and late payment of VAT. The new system also changes the way in which interest is calculated when taxpayers are late in paying HMRC and when HMRC are slow to repay VAT owed back to the taxpayer.
Under the new system penalty points are accrued for late filing of VAT returns, this is intended to be less punishing when the taxpayer misses the occasional deadline and will only punish those repeat offenders. HMRC will allocate 1 penalty point each time a filing deadline is missed and the points for late returns will expire after the specified period has elapsed. It is, however, important to note that points can be earned for late nil returns as well as those where HMRC needs to make a repayment, so it is important to ensure returns are filed on time even if there is no VAT to pay.
When you reach the relevant number of points, a £200 penalty will be charged. All subsequent missed deadlines will also trigger the same penalty.
Points for penalties
A penalty will be charged when your total equals these thresholds:
Submission Period | Points Threshold |
Annual | 2 Points |
Quarterly | 4 Points |
Monthly | 5 Points |
Resetting the points clock after a penalty
The penalty points that you have accumulated will not automatically expire as normal once you have triggered a penalty. Instead, to reset the clock you will have to meet two conditions. Condition A – a period of compliance where all returns are filed on time, this test depends on your submission timeframe the compliance periods are shown below. Condition B submit any outstanding returns due in the prior 24 months.
Submission Timeframe | Compliance Period |
Annual | 24 Months |
Quarterly | 12 Months |
Monthly | 6 Months |
Late payment of VAT
As well as penalties for late filing of VAT there will, under the new system, be charges for late payment of any VAT due. This will apply in two stages, fixed penalties and daily penalties: basically, the later the payment is, the higher the rate of penalty charged.
Payments that are made up to 15 days after the specified payment deadline will not trigger a penalty regardless of the number of occurrences. There is also a general exclusion to late payment penalties where a taxpayer contacts HMRC and agrees a Time To Pay Agreement.
For payments that are between 16 and 30 days late will trigger a penalty of 2% of the outstanding amount on day 15. To help businesses transition to the new scheme HMRC will not apply this rule during 2023 unless payments are more than 30 days late.
Payments that are 31 days late or more will trigger a 2% penalty of the amount outstanding at day 15 plus an additional 2% penalty calculated based on the amount outstanding at day 31 (a total of 4% if nothing has been paid).
From day 31, there will also be a daily penalty (calculated at 4% per annum) on the amount outstanding, a VAT liability left unpaid for over 12 months will have triggered a total of 8% in tax penalties.
Interest on overdue tax will continue to be charged from the due date at Bank of England base rate plus 2.5% and will continue to accrue even where a time to pay arrangement has been agreed. The formula for calculating this penalty charge is as follows:
Gross Debt x (Bank of England base rate + 2.5%) x (number of days late / 365.
How to Avoid Penalties
The easiest and most obvious way of avoiding penalties is filing returns and paying VAT on time. However, if you can’t afford to pay your VAT bill, it is still best to file your return on time and in doing so avoid the risk of £200 penalties, then approach HMRC for a Time To Pay Agreement.
Now the new system has come into operation, HMRC have indicated that they intend to allow a ‘period of familiarization’. In essence this means that businesses will not be charged a first late VAT payment penalty for payments up to 30 days late until after 31 December 2023. Businesses will be allowed to take time to get used to the changes due to HMRC’s ‘light touch’ for the first phase of penalties.
As always, a business will have the right to challenge either a late filing point or late payment penalty within 30 days of being notified of the point/penalty by HMRC. This can be done either through a request for HMRC to carry out an internal review of the decision or by an appeal to the First-tier Tax Tribunal. In all cases, the taxpayer will need to prove that they had a ‘reasonable excuse’ for not meeting the relevant deadline – the definition of a reasonable excuse has not changed. There will be an online option for HMRC appeals shortly.
Existing default surcharges
From 1 January 2023, all businesses will begin with a ‘clean slate’ in respect of VAT late filing and payment penalties – there are no transitional arrangements although returns with a starting date before 1 January 2023 will still be covered by the Default Surcharge regime and HMRC will issue and enforce penalties under that regime.
Interest
The new regime not only covers default interest, when a taxpayer is late in paying HMRC but also Repayment Interest, when HMRC is late paying a taxpayer.
Late payment interest is charged from the first day that the payment is overdue until the day it’s paid in full. It’s calculated at the Bank of England base rate plus 2.5%, you will need to check what the Bank of England base rate is when making this calculation as this is changing monthly at the moment.
Where an amount due is paid in instalments, such as under a Time to Pay arrangement, HMRC also charges interest on the outstanding balance until the tax is paid in full.
Repayment interest
For periods starting on or after 1 January 2023 if HMRC is late in paying a taxpayer may be entitled to repayment interest on any VAT owed.
Repayment interest is paid at the Bank of England base rate minus 1%, with a minimum rate of 0.5%. However, HMRC will not pay repayment interest for periods where taxpayers have any outstanding VAT returns.
VAT returns which do not incur penalties
There are certain situations where points will not be accumulated, and these are listed below:
· First VAT return if you’re newly VAT registered.
· Final VAT return after you cancel your VAT registration.
· One-off returns that cover a period other than a month, quarter, or year.
Further Reading
