HMRC is introducing a new VAT penalty regime which comes into effect from January 2023. This will change the way that penalties are issued for submitting late VAT returns and paying VAT late. This signals real change and is designed to be fairer, with repeat offenders of late filing and non-payment of VAT returns being impacted the most. It will bring the penalty regime in line with those for direct tax filing obligations and the biggest change being that penalties will now apply to persistent late filing of a VAT returns (even where there is no liability to HMRC to be reported), as well as to late payment of the declared VAT liability.
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What is the new VAT penalty scheme?
So, for VAT return periods starting on or after 1 January 2023, the new penalty regime will work on a points-based system and it will work as a two-part system, the first affecting late filing offenders and the second late payment of the VAT return liability.Â
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Part One: Late filing of VAT returns
This part will operate on a points-based system meaning that even if there is nothing to declare, a penalty point will be given on each occasion that a business fails to submit its VAT return on time, and once the penalty points threshold has been met (which is based on the frequency of a business’ VAT returns – see below), penalties will begin to be assigned. This will start with a £200 penalty and will be followed by a further £200 penalty for each subsequent late submission.
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VAT return submission freq. | Penalty points threshold | Period of compliance |
Annually | 2 | 24 months |
Quarterly | 4 | 12 months |
Monthly | 5 | 6 months |
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Can you reset your penalty points?
All points will be cleared from the system once they are two years old and it is also possible to reset your penalty points back to zero, subject to the following conditions being met:
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- Ensure that subsequent VAT returns are submitted on or before the due date for your period of compliance
- Ensure that all outstanding VAT returns due for the previous 24 months have been received by HMRC
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Part Two: Late payment of VAT return liability
So, this will be more familiar as default surcharges were also based upon percentages. The revised method is however, designed to operate more fairly than its predecessor by encouraging taxpayers to pay the VAT liability sooner by having lower penalty rates when making earlier payments. Previously, some may recall that the current system applies a set percentage, irrespective of how soon after the due date the VAT return payment was made.
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How will the penalty be calculated?
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Length of time overdue | Penalty |
Up to 15 days | There will be no penalty if the VAT is paid in full by day 15 after the due date or a payment plan is agreed on or between days 1 to 15. |
Between 16-30 days | A first penalty will be calculated at 2% on the VAT owing at day 16 until day 30 (after the due date for payment). |
31 days or more | Additionally, if there is still VAT owing after 30 days past the due date, a second penalty will then become payable and is calculated at a daily rate of 4% per year for the duration that the outstanding balance remains. |
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Period of grace:
In order to enable businesses to get used to the new changes, HMRC will not charge a first late payment penalty for the initial year (1 January 2023 – 31 December 2023), providing that the VAT is paid in full within 30 days of the payment due date.
Interest on overdue payment of VAT will continue to be charged with interest at a rate of 2.5% over Bank of England base rate and will continue to accrue even in circumstances where a time to pay arrangement has been put in place
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If you have any questions about the upcoming changes to VAT penalties, please don’t hesitate to get in touch with our in-house VAT specialist, Jessica Mason.
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Email: [email protected]
Phone: 02476 306029
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