HMRC introduces new VAT penalty regime from January

A new VAT penalty regime and changes to VAT interest are being introduced from January 2023.

VAT registered businesses will see a shake-up in the way that HMRC levies penalties for the late submission and payment of VAT returns.

From 1 January next year, the current default surcharge regime will no longer apply, and it will be replaced with new penalties for the late submission of VAT returns and late payments.

Late submission penalty for VAT returns

The new late submission penalty is a ‘points-based’ system. It has been designed to impose the highest penalties to those that file VAT returns late, while being fairer and more consistent for those businesses that occasionally file late.

Under the new regime, HMRC will issue a point every time a VAT return is submitted late. Once the number of points has accumulated to the ‘penalty threshold’, a fixed financial penalty of £200 will be charged for that late submission and every subsequent late submission.

This means that, unlike the default surcharge regime, the new late submission penalty will apply to VAT registered businesses that are normally in a repayment position.

The points threshold depends on the VAT return submission frequency:

• Annually – two points
• Quarterly – four points
• Monthly – five points

Points will expire after 24 months if the taxpayer remains under the penalty threshold. After a penalty is imposed, points will reset to zero if there are no further late submissions in the following timeframes, depending on the submission frequency:

• Annually – 24 months
• Quarterly – 12 months
• Monthly – six months

TIP:  Always try to submit your VAT returns on time even if you know that you cannot pay the VAT liability by the due date. Once the VAT return has been submitted, you can explore ways to pay the debt to HMRC, for example, agree a ‘Time to Pay’ arrangement.

Late payment of VAT penalties

The new regime for late payment of VAT is split into two penalties. Notably, no penalty will be incurred if the VAT liability is paid within 15 days of the due date.

Once 15 days have passed, the first penalty of 2% of the VAT outstanding will become due. If the balance remains unpaid at the end of day 30, a further 2% penalty will be calculated on the outstanding balance.

If the VAT liability remains unpaid on day 31, a second, additional penalty will be imposed that accrues on a daily rate of 4% per year of the outstanding balance until it has been paid in full.

HMRC have said that they will operate a light touch in the first 12 months to 31 December 2023 and will not charge the initial 2% late payment penalty if the VAT liability is paid in full within 30 days of the due date.

It is important to note that, if you are struggling to pay your VAT liabilities, you can request a ‘Time to Pay’ arrangement to agree a payment plan. If the’ Time to Pay’ arrangement is agreed with HMRC, it will stop late payment penalties from accruing.

TIP: If you pay your VAT liabilities by bank transfer you could consider setting up a Direct Debit – the VAT liability is automatically paid to HMRC three to five days after the due date.

VAT interest

As well as the new penalty regime, HMRC will also be bringing the VAT interest rules into line with other taxes from 1 January 2023.

Currently, no late payment interest is charged. Instead, it forms part of the default surcharge regime.

From 1 January 2023, HMRC will charge interest at the Bank of England base rate plus 2.5% on overdue VAT liabilities. Interest will also be charged on late submission and late payment penalties that remain unpaid after 30 days.

Finally, repayment interest will replace the 5% repayment supplement for VAT periods beginning on or after 1 January 2023. Repayment interest will be paid at a much lower rate using the Bank of England’s base rate minus 1% with a minimum of 0.5% being paid by HMRC from either the due date of the VAT return or the date the return is submitted, whichever is later.

Key Points:

• The new penalty and interest regimes apply to VAT periods starting on or after 1 January 2023. The current default surcharge regime will continue to apply for VAT periods that end on 31 January 2023 or 28 February 2023.
• The late submission penalty regime applies to all VAT registered businesses that file their VAT returns late. This includes those businesses that are normally in a repayment position and not affected by the current default surcharge regime.
• The late payment penalty will be charged if the VAT liability remains unpaid 15 days after the payment due date but in the first year to 31 December 2023, HMRC have said that they will not charge the initial 2% penalty if the VAT liability is paid within 30 days.
• Interest will be charged when the VAT liability is paid late and will be charged at 2.5% above the Bank of England’s base rate.
• HMRC have said they will publish detailed guidance on the new penalty and interest regimes later this month.

If you are affected by these changes, or if you would like to discuss ‘Time to Pay’ in more detail, please speak to me or your usual Westcotts advisor at one of our offices.