Changes to the VAT penalty regime

As if there haven’t been enough changes to contend with in recent times in the ever-evolving world of VAT; Making Tax Digital, Domestic Reverse Charge, temporary VAT rate changes as a result of Covid-19 and our good friend Brexit; further changes are coming…

With effect from 1 January 2023 there are new penalties and changes for;

• Late filing of the VAT return
• Late payment of the VAT liability
• Interest charged

As this is a change of regime, previous defaults will not count and therefore you start with a clean slate.

Late filing

A points-based system will be in operation and one point will be awarded for each failure to file on time.

The penalty point threshold and period of compliance differs depending on the frequency that the business submits its VAT returns.

Once the above number of points have been exceeded, a penalty of £200 will be incurred. Each subsequent late submitted return will also incur a £200 penalty. Please note that this also applies to nil VAT returns or repayment returns which under the old regime, did not incur a penalty.

The number of points can be reset to zero if all returns for the subsequent period of compliance are submitted on time and HMRC receives all outstanding returns for the previous 24 months.

Changes to the frequency of submission (e.g. changing from an annual VAT scheme to a quarterly scheme) will change the penalty point threshold.

Late payment

• If payment is late but paid in full or a Time To Pay Plan (TTP) is agreed with HMRC within 15 days of the due date – no penalty is levelled.
• If a payment is made between 16 and 30 days from the due date – the penalty is 2% of the amount owed at day 15 if settled in full or a TTP is agreed before day 30.
• If payment is made 31 days or more after the due date – the following penalties are applied;

– First penalty 2% of the amount outstanding at day 15, plus 2% on the amount outstanding at day 30 plus;

– A second penalty calculated at a daily rate of 4% per annum on the amount outstanding, which is levied when the amount is settled in full or a TTP is agreed.

Please remember interest will be charged where payments are made late regardless of whether a late payment penalty is imposed.

Interest

Interest will be calculated and charged from the due date of payment until the liability is paid in full. Consequently, this means that TTP agreements may not attract a late payment penalty but will still attract interest.

The rate of interest charged is the Bank of England base rate + 2.5%. The current base rate is 3% and therefore if interest rates remain the same, HMRC will be charging 5.5% interest (per annum) on late payments.

HMRC will pay you interest on a repayment return. The interest is calculated from the day after the due date of the return or the date of submission (whichever is the later) until HMRC makes repayment in full.

The rate of interest is the current Bank of England base rate -1%, however, a minimum rate of 0.5% applies which doesn’t seem fair if you ask me!

Summary

The changes to the VAT penalty regime have been designed as a result of changes to digital reporting and are seen to be a more modern and fairer system.

All three parts of this penalty regime will apply to self-assessment in due course so it is worth familiarising yourself with the rules now.

It is more important than ever to ensure that your bookkeeping and VAT internal processes are up to scratch to prevent the imposition of these new penalties on your business.

Lambert Chapman are here to help and advise should you have any concerns or would like any assistance.