For VAT returns for tax periods beginning on or after 1 January 2023, the new late payment penalty system is to be replaced by a points-based late payment penalty system and a new late payment system.
Late submission of VAT returns and points-based system
The new penalty point system for late VAT returns is intended to be less punitive when a taxpayer occasionally misses a return deadline. The new system will penalise those who persistently fail to meet their obligations.
The points system will work in such a way that for each late VAT return, the taxpayer will receive one penalty point.
Once the relevant number of penalty points has been reached, a penalty of £200 will be charged.
The penalty will be charged when the total number of points is:
– annual VAT returns: 2 points
– quarterly returns: 4 points
– monthly declarations: 5 points
The new penalty system will be applied in two stages – fixed penalties and daily penalties. For penalties for late payments, the sooner you make a payment, the lower the penalty rate will be.
No penalties will be charged for payments up to 15 days late after the due date.
Payments 16 to 30 days late will be subject to a penalty of 2% of the amount outstanding on day 15 if you pay in full (or agree a payment plan on days 16-30).
Payments more than 31 days late will result in a penalty of 2% of the amount overdue on day 15 plus an additional 2% penalty calculated on the amount overdue on day 30 (i.e. a total of 4% if nothing has been paid).
From day 31 onwards, a second penalty calculated at a daily rate of 4% per annum for the entire period of arrears will also be charged. This is charged when the outstanding balance is paid in full or a payment plan is agreed. The penalty is only charged on the tax due on the dates the penalty is triggered.
No penalties will be charged for payments up to 15 days late.
Payments 16 to 30 days late will incur a penalty of 2% of the amount overdue on day 15 if you pay in full (or agree a payment plan on days 16-30).
Payments more than 31 days late will result in a penalty of 2% of the amount overdue on day 15 plus an additional 2% penalty calculated on the amount overdue on day 30 (i.e. a total of 4% if nothing has been paid).
From day 31 onwards, a second penalty calculated at a daily rate of 4% per annum for the entire period of arrears will also be charged. This is charged when the outstanding balance is paid in full or a payment plan is agreed. The penalty is calculated only on the tax due on the penalty trigger dates.
Interest on overdue tax will accrue from the due date at the Bank of England base rate plus 2.5% and will continue to accrue even if a payment plan is agreed.
If the company has overpaid tax, interest on the overpaid tax will be charged at the Bank of England base rate less 1%.
To allow time to get used to the changes, HMRC will not charge the first late payment penalty in the first year from 1 January 2023 to 31 December 2023, provided all tax due on the return is paid in full within 30 days of the due date.
Of course, filing your return and paying VAT on time is the best way to avoid additional costs. Here are tips on how to avoid potential penalties:
– Set up a direct debit so HMRC can automatically collect the amount due and ensure the deadline is not missed.
– If your business cannot afford to pay all the VAT, set up a Time to Pay arrangement with HMRC. Interest will still accrue but the penalty clock will stop ticking.
As always, a business will have the right to appeal a late filing or late payment penalty within 30 days of HMRC receiving notice of the point/penalty, based on a ‘reasonable excuse’. The definition of reasonable excuse has not changed. As the penalties will be fairer, HMRC hopes that the new penalty regimes will result in fewer taxpayer appeals.
