Below are the highlights of the changes in the VAT penalty regime coming into effect 1st January 2023.
The current penalty regime sees escalating penalties for each time a return is not paid on time, for the first late payment it is 0% penalty, thereafter, each late return incurs a penalty of 5%, then 10% and then 15% thereafter.
Even if payment is made one day late, the penalties apply, so the current regime is quite harsh for a payment made one day late. Of course, if there has been a banking error then the penalties can be appealed.
Once in the penalty regime the business must make payment on time for 12 months (four returns if quarterly) and then the penalties reset to nil.
The new penalty regime is more nuanced than before, in many ways, it is a fairer approach albeit not so simple as the previous regime. There are three separate penalties in play:
Penalty 1 – Late submission of a return
Taxpayer receives one penalty point for late filing/submission. Once a point threshold is hit, a flat penalty of £200 applies.
Annual return – 2 points
Quarterly returns – 4 points
Monthly returns – 5 points
Annual returns – 24 months
Quarterly returns – 12 months
Monthly returns – 6 months
So, filing a VAT return late does not automatically trigger a penalty but regular and consistent late returns will eventually see a fixed penalty applied.
Penalty 2 – Late payment (First penalty)
Separate to filing a VAT return, there is then the matter of actually paying the VAT return. Where:
Payment is made within 15 days of due date = no penalty
Payment is made within 16-30 days of due date = 2% of VAT due
Payment made after 30 days of due date = 4% of VAT due/liability but calculated on 2% of VAT due at 15 days mark plus 2% of VAT at 30 days mark (part payments can therefore reduce the penalty paid but not the penalty percentage)
Penalty 3 – Late payment (Second penalty)
VAT that remains unpaid after 31 days, there is an additional daily penalty of 4% commencing from day 31 until VAT is paid in full.
In addition, all late payments are subject to interest charges from the due date to the date the VAT is paid. Interest is calculated at 2.5% above Bank of England interest rate.
If a taxpayer has a genuine reason for not paying on time and enters int the 2% upwards part of the penalty regime, the usual provisions around reasonable excuse continues to apply. Taxpayers will still be able to request a review by HMRC in respect of any late-payment penalty charged although it is best to obtain advice beforehand as the mitigation for late penalties is limited and HMRC may be less lenient in future on the basis the new penalties are already weighted in fair play.
In the first year of these new penalties, there will be a “period of familiarisation” whereby HMRC will not charge the first part penalty (the 2% from day 15 to day 30) from 1 January 2023 until 31 December 2023. This means that, provided payment is made before the 30th day of the due date, no late payment penalty will arise in the first year that these new penalties are in effect. The late payment interest charges remain charged as usual.
This soft landing may be welcome by some, especially if they are having cashflow difficulties. However, it’s unlikely to be a good idea to get into the habit of paying late, not least because when the “period of familiarisation” ends, the business does not want to have formed a bad habit of paying late.
How can we help?
Whilst the new penalties have some attractive features – in particular the fact that missing a payment by a few days will no longer result in a penalty – there are other aspects that could catch businesses out.
We can help with ensuring your business is MTD compliant, that there are processes in place to so that VAT returns are filed on time and where the business may be struggling to make payment, we can assist in cash flow planning, seeking a Time to pay Agreement and other assistance to help the business avoid the unnecessary costs of VAT penalties and enabling you to carry on with your business uninterrupted and avoiding undue disputes with HMRC.
Get in touch
If you are struggling with payments or have little time to spend on your payment processes and accounting or have queries about possible disputes or tribunals with HMRC, our tax, VAT and accounting experts can assist, so feel free to contact us.
Sign up to our newsletter
Join our mailing list to receive regular updates on
the news and events you need to know about.