New VAT Penalties

As of the 1^st January 2023, HMRC’s new VAT penalty system for late submissions and payments will come into effect. This will replace the old “default surcharge” system and will apply to VAT registered businesses for accounting periods beginning on or after the 1^st January 2023. Below, we will look at the different penalties for late submissions, changing frequency of submissions and late payment penalties.

Late Submission Penalties

HMRC have adopted a points-based system for late submissions, with one point added per offence. The thresholds are different for each submission frequency as illustrated below:

Once a threshold is reached, HMRC will issue a penalty of £200, with every subsequent failure also resulting in a £200 fine. Please note, as the points do not increase once you reach the threshold, the penalty is issued once the threshold is reached. For example, if you submit returns quarterly you will be issued the £200 penalty when you receive the fourth point.

If a business has reached the points threshold, HMRC will reset the points to zero once you meet both of the following conditions:

1. A period of compliance (that is, meeting all submission obligations on time for the period of compliance
2. The taxpayer has submitted all the submissions which were due within the preceding 24 months. It does not matter whether or not these submissions were initially late.

However, if a taxpayer has met the above conditions (when at the points threshold) but has an outstanding submission the accrued points will not be reset, and the taxpayer will continue to be penalised for any further late submissions.

Please see below the periods of compliance:

Changing Frequency of Submissions

If a taxpayer decides to change the frequency of their submissions and has no penalty points, HMRC will not penalise them for simply changing the frequency and will carry over the zero points balance. However, if the taxpayer does have penalty points when changing submission frequency, then the penalty points will be adjusted to what the equivalent points would be if they had incurred them on the new frequency. For example, if a taxpayer had two penalty points on the quarterly submission frequency, then when they move to monthly submissions, they will have three points. See below the full list of adjustments:

Late Payment Penalties

The new penalty system for late VAT payments is being introduced at arguably one of the toughest times for small businesses. However, the overriding message is that you will be rewarded for being pro-active and it no longer allows businesses to bury their head in the sand as the sooner you pay, the lower the penalty rate will be.

The penalties are as follows:

• The taxpayer will not incur a penalty if the outstanding tax is paid up to 15 days after the due date or a payment plan is agreed with HMRC.
• If the taxpayer pays between 16 and 30 days after the due date, or agree a payment plan, this penalty is set at 2% of the debt which remains outstanding after day 15.
• After day 30, an additional 2% penalty of the outstanding liability will be added.
• It accrues daily at a rate of 4% per annum on the outstanding debt. This additional penalty will stop accruing when the taxpayer pays the tax that is due.

If you know you cannot pay your VAT liability by the deadline, speaking to HMRC and setting up a payment plan is crucial as this negates all interest penalties after the Time To Pay (TTP) arrangement is agreed. The good news is that between 1^st January and 31^st December 2023, a first late payment penalty will not be charged if you pay your liability in full within 30 days of your payment due date.

If you are a taxable business who are often in VAT repayment positions, the good news is that HMRC are introducing repayment interest from the 1^st January 2023. The rate of interest will be 1% below the base rate set by the Bank of England, with a minimum rate of 0.5%, and is calculated from the day after the due date or date of submission (whichever is later), until HMRC repays you in full.

Please do contact us if you have any questions or call us on 01276 61203