A new VAT penalty system is now in effect

A major overhaul of VAT penalties came into effect on 1 January 2023. This new approach changes how penalties are applied, as well as how interest is calculated and paid. In this article, we’ll break down what you need to know about the changes.

What is changing?

The biggest change that businesses can expect is a replacement of default surcharges with new penalties for late submissions and late payments. The objective of this shift is to reward businesses that comply with their VAT obligations on a timely basis. Additionally, the calculation of VAT interest has changed, including how it is calculated and paid.

Who is affected?

All businesses submitting VAT returns starting on or after 1 January 2023 are affected by these changes. It’s important for companies to note that these changes may also affect their tax planning strategy and potential savings from earlier payment dates.

How do the new penalties work?

HM Revenue & Customs (HMRC) has outlined a points-based system for late submission penalties intended to incentivise businesses to comply with their reporting obligations which will be applied if either the Return or payment are late.  The frequency with which returns are filed have different points thresholds as follows:

             Frequency                  Points

            Annually                      2

            Quarterly                     4

            Monthly                       5

Once the points threshold has been reached a £200 fine is imposed on the entity.  If the next return or payment are also made late a further £200 will be imposed.  If, however, the next return is submitted and paid on time then the number of points stay at 4 but no fine is triggered.

In order to remove the points the VAT Registered entity must meet two conditions:

            Condition A

            Complete a period of compliance which means submitting and paying all returns over a period defined by the VAT Return frequency as follows:

            Annually                      24 months (two returns)

            Quarterly                     12 months (four returns)

            Monthly                         6 months (6 returns)

            Condition B

            Submit any outstanding returns from prior to hitting the points threshold.

The penalty points will be reset to zero on the first day where both condition A and condition B are met.   The guidance and an example of points removal can be found at https://www.gov.uk/guidance/remove-penalty-points-youve-received-after-submitting-your-vat-return-late

In addition to the above points system the following surcharges will be applied if the VAT liability is paid late.

Up to 15 days overdue

You will not be charged a penalty if you pay the VAT you owe in full or agree a payment plan on or between days 1 and 15.

Between 16 and 30 days overdue

You will receive a first penalty calculated at 2 per cent on the VAT you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.

31 days or more overdue

You will receive a first penalty calculated at 2 per cent on the VAT you owe at day 15 plus 2 per cent on the VAT you owe at day 30.

You will receive a second penalty calculated at a daily rate of 4 per cent per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full or a payment plan is agreed.

The frequency-dependent thresholds for penalty points mean that more frequent non-compliance results in higher penalties. However, should a business meet its obligations within the given timeframe, all penalty points are reset back to zero and no further action will be taken against it.

Businesses should also take note of the benefits associated with paying sooner rather than later when it comes to VAT. Paying early means fewer late payment fees, as well as interest due on top of those fees if they are not paid within 30 days of filing a return or making an adjustment request after filing one’s return.

For those who do pay late but still manage to file their returns before the deadline, there are still ways they can reduce their overall financial burden by paying off any outstanding taxes before incurring additional costs in interest charges or late payment fees.

With the new year upon us already, businesses need to be aware of the possible consequences of late returns and payments.