From 1 January 2023 two new and very different penalty systems will be introduced for VAT. One will penalise businesses for submitting late returns and the other when the VAT is paid late. These new penalty regimes will replace the current default surcharge system which covers both the submission and payment of VAT returns and which has been in place for over 30 years.
The aim of the new systems is to penalise those who persistently offend rather than those businesses who make the occasional mistake.
The new penalty systems will take effect for VAT periods commencing on or after 1 Janaury 2023, and will penalise businesses who submit late returns and/or make late payments.
Penalties for late returns
Under the new penalty regime for the submission of late returns, taxpayers will no longer receive an automatic penalty if they fail to meet a submission deadline. Instead a points-accumulation system will apply and for each late return submitted a business will get one point. Once a business reaches its points threshold then HM Revenue & Customs (HMRC) will issue a £200 penalty. The penalty threshold depends upon the frequency that a business is required to submit its returns:
- Monthly returns – the threshold is five points;
- Quarterly returns – the threshold is four points;
- Annual returns – the threshold is two points.
When a taxpayer has reached the relevant threshold, a penalty will be charged for that failure and for every subsequent failure to make a submission on time, but their points total will not increase.
However, it will be possible for businesses to have points they have accumulated removed and return to zero points provided two conditions are satisfied:
- All returns for the previous 24 months have been submitted; and
- They have submitted all returns on time for their relevant period after reaching their threshold. The relevant period is 24 months for a business submitting annual returns, 12 months for quarterly returns and six months for monthly returns.
Taxpayers will therefore remain at the penalty threshold and continue to be charged penalties for any further failures to submit on time until all outstanding submissions have been made.
The new system will mean those who submit monthly returns will become the first business impacted by the new penalties, with the earliest that a penalty could be incurred being 7 July 2023 based on returns for the months of January to May 2023 all being late.
Penalties for late payment of VAT
Under the new system the lateness of the payment will determine the level of the penalty:
- No penalty will be charged for any tax paid within the first 15 days after the due date;
- For tax paid between day 16 to 30 there will be a 2% penalty applied to the VAT outstanding at day 15;
- For tax unpaid at day 30, in addition to the 2% penalty applied to the amount owed at day 15, a further 2% will be charged on the amount outstanding at day 30;
- Payments made or payment plans agreed after 30 days from the due date will be subject to a further penalty based on an annualised rate of 4%.
A payment plan, if agreed, will have the same effect as paying the tax and stop penalties accruing form the date the taxpayer approaches HMRC to agree it, provided the taxpayer continues to honour the terms of the agreement.
HMRC have indicated they will operate a period of familiarisation for the first-year until 31 December 2023, with no penalty being issued provided that all tax owed is fully paid within 30 days of the due date.
Although the new system will mean no penalty is applied provided the VAT due is paid within 15 days of its due date, late payment interest will be applied from the original due date. Interest will be calculated at the Bank of England base rate plus 2.5%.
Under the new system there will no longer be any repayment supplement. This previously meant that where HMRC delayed a repayment by more than 30 days it paid a 5% supplement to the taxpayer. Instead any repayments will be subject to repayment interest which will be calculated at the Bank of England base rate less 1%, subject to a minimum annual rate of 0.5%.
HMRC will have discretionary powers to reduce or not charge a penalty on late payments and there will also be no penalty if a reasonable excuse exists for the late payment. Equally, a late submission penalty or addition of points can be appealed if HMRC can be satisfied that there is a reasonable excuse for the default.
VAT registered businesses should therefore consider the following points to avoid potential penalties or accruing points under the new system:
- Ensure they submit returns on time even where it is a nil or a repayment return;
- Consider setting up a direct debit with HMRC for their VAT payment so that HMRC automatically collect the payment three working days after the due date;
- If a time-to-pay arrangement is required, ensure they approach HMRC as soon as possible.
If you have any questions regarding the new penalty regimes for VAT, please speak to our Tax Director, Jenny Marks.
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