A Quick Guide to the New VAT Penalty Regime
On 4th January 2023, HMRC published guidance on a new penalty regime for late submission and payment of VAT returns, which has brought VAT penalties closer in line with those currently in place for direct tax returns.
The new penalty charges apply to all VAT accounting periods starting on or after 1st January, and unlike the previous regime, they prevent businesses from being penalised for small errors in VAT reform compliance.
Don’t panic – no action is required!
However, if you own a VAT-registered company, it is important to understand the new rules to ensure your business can avoid any penalties in the future. Read on to learn more about the new regime, how it differs and how it could impact your business.
Penalty points for late VAT returns
Earlier this year, HMRC introduced a new points-based system for the late submission of VAT returns.
Under the new penalty regime, VAT return submissions made after your deadline will be subject to a single penalty point. Your business will then “rack up” points for every late submission or payment until it reaches the threshold for your accounting period.
Penalty points under the new system also apply equally to payment and repayment / nil returns traders, something that did not apply under the old system. However, as from January, even a repayment business needs to ensure it gets all VAT returns in on time, to save the business getting a penalty point.
When you reach the penalty point threshold, you’ll then receive a £200 penalty – and for every late submission after reaching this point, you will receive an additional £200 penalty charge.
Submission deadlines differ depending on your accounting period. In many cases, your business will have a standard accounting period, which is either monthly, quarterly, or annually, with thresholds as follows:
- Annually – threshold of 2 penalty points
- Quarterly – threshold of 4 penalty points
- Monthly – threshold of 5 penalty points
If you have non-standard accounting periods, you change your accounting periods, or you’re taking over a business, it is best to seek advice from a professional tax accountant to ensure your business doesn’t acquire avoidable penalty points.
Penalty charges for late payments
HMRC have also made changes to the penalties for late VAT return payments, changing the existing system to a two-part default charge:
First charge
With the new regime now in place, companies with accounting periods starting on and after 1st January 2023 whose VAT return remains unpaid after 15 days of the due date, will have a first charge imposed. This is 2% of the outstanding VAT on day 15.
Second charge
If the penalty remains unpaid after 30 days, a default second-charge penalty is enforced from day 31. This is an additional 2% of the VAT outstanding and is a daily penalty calculated at 4% each year.
For example, if your outstanding VAT return is left unpaid for 13 months, your business will have accumulated a total of 8% in tax penalties.
No charges will apply if your VAT return is paid within 15 days after the due date. Therefore, the first and second charges will only become due if the VAT payment remains unpaid at the end of day 15, day 30, or after the due date payment.
For example, if your return due date is March 2023, VAT will only become payable on 7th May. Therefore, payment needs to be made by close of play on 22nd May, before a 2% penalty falls due.
A transition period will also be applied between 1st January 2023 and 31st December 2023. During this transition period, HMRC will not impose the first charge on taxpayers, as long as their VAT liability is paid in full within 30 days of the payment’s due date. If they exceed the 30-day window, the first and second charges will be applied.
If you’re unsure about how this will impact your business, we recommend speaking to a tax advisor.
Interest charges on late payments and repayments
As part of the new penalty regime, VAT-registered companies will now be charged a late payment interest by HMRC.
This is calculated at the Bank of England base rate plus 2.5% and will be charged from the first day that the payment is overdue. Businesses will continue to be charged interest until the penalty is paid in full.
Challenging your late submission payment penalties under the new regime
Much like the previous default surcharge regime, businesses are able to challenge any penalties they incur from HMRC in relation to their VAT returns.
HMRC will state any penalties in a penalty decision letter, and for every penalty point or £200 penalty charge, you will be offered the chance to appeal. If you have a reasonable excuse, your penalty may be cancelled or amended.
Learn more about how and when you can appeal against a penalty, or how you can choose a review or appeal to the tax tribunal.
Comparison to the previous system and the impact of these changes on businesses
If your accounting period started on or before 31st December 2022, late VAT return submissions and payments were penalised by a single default surcharge.
VAT-registered businesses who made a late submission or payment would previously have received a surcharge liability notice for the first default, which is a percentage of the VAT due on the return. Subsequent defaults would then be surcharged at 2%, 5% and 10% up to a maximum of 15%.
Due to the surcharge, many companies have been inflicted with large fines, even if they were only a few days late in paying their liability. Contrastingly, under the new regime, businesses that submit or pay their VAT returns late due to errors such as poor cash flow or administrative faults will now only acquire small penalties.
However, if your business is often more than 30 days late paying its VAT returns due to cashflow issues, the new system could leave you with ever-increasing penalties if not managed correctly.
Edwards Accountants
Our widely recognised and respected chartered accountants in Walsall can help your business remain up to date with the latest changes and ensure that your business remains compliant and tax efficient.
From corporate tax planning services such as R&D tax relief to supporting family investment companies, we can help your business across a range of taxation services. Find out more by getting in touch with our team.
