The VAT default surcharge regime was due come to end on 31 March 2022 but, on 13 January 2022, HMRC announced that it will continue until 31 December 2022. The government has said the delay “allows HMRC to ensure the IT changes necessary for the new penalties and interest charges can be introduced as effectively as possible…”.
Assuming no further delay is announced, from 1 January 2023, the system is to be replaced by a new penalty system with separate penalties for late submission of VAT returns and late payment of VAT.
Late VAT returns – don’t rack up points
The new penalty points system for late VAT returns, which is intended to be adopted across all taxes as the move to Making Tax Digital continues, is intended to be less punitive where the taxpayer misses the occasional deadline. HMRC will allocate a taxpayer 1 point each time a filing deadline is missed and, like driving licence ‘points’, your points for late returns will expire after two years unless you go over the penalty thresholds.
When you have racked up the relevant number of points (see table) a £200 penalty will be charged. All subsequent missed deadlines will trigger a penalty, although, you will not get any extra points if you have to pay a penalty.
Points for penalties
A penalty will be charged when your total equals these thresholds:
- Annual VAT returns 2 points
- Quarterly returns 4 points
- Monthly returns 5 points
Resetting the points clock after a penalty
The penalty points that you have accumulated will not automatically expire as normal once you have triggered a penalty. Instead, to reset the clock you have to meet a longer test of good compliance (ie submitting everything on time) for a specified period and submit any outstanding returns due in the prior 24 months. The good compliance period will depend on your return cycle: it will be 24 months for organisations filing Annual returns, 12 months for Quarterly returns and 6 months for monthly filers.
Late payment of VAT
The new system will apply in two stages, fixed penalties and daily penalties: basically the later the payment is the higher the rate of penalty charged.
Payments that are up to 15 days late (ie after the specified payment deadline) will not trigger a penalty.
Payments that are between 16 and 30 days late will trigger a penalty of 2% (of the amount outstanding at day 15)
Payments that are 30 days late or more will trigger a 2% penalty of the amount outstanding at day 15 plus an additional 2% penalty calculated based on the amount outstanding at day 30 (ie a total of 4% if nothing has been paid)
From day 31, there will also be a daily penalty (calculated at 4% per annum) on the amount outstanding, e.g. a VAT liability left unpaid for 13 months will have triggered a total of 8% in tax penalties.
Interest on overdue tax will continue to be charged from the due date at Bank of England base rate plus 2.5% and will continue to accrue even where a time to pay arrangement has been agreed. Where a business has overpaid tax, interest on overpaid tax being repaid will be at Bank of England base rate less 1%.
Avoiding a penalty
Obviously, filing returns and paying VAT on time is the best way to avoid extra costs. However, if you can’t afford to pay your VAT bill, it is still best to file your return on time and approach HMRC for a Time To Pay Agreement. If an instalment payment plan is put in place, the standard interest charges on late payments are frozen from that day and will not be enforced if you stick to the payment plan.
We understand that during 2023 HMRC is planning to apply a ‘light touch’ when it comes to the first phase of penalties. This means that, where payment is made between 16 and 30 days after the due date, it may waive the initial 2% penalty where the taxpayer is ‘doing their best’ to comply (a concept not yet fully defined).
As always, a business will have the right to challenge either a late filing point or late payment penalty within 30 days of being notified of the point/penalty by HMRC. This can be done either through a request for HMRC to carry out an internal review of the decision or by an appeal to the First-tier Tax Tribunal. In all cases, the taxpayer will need to prove that they had a ‘reasonable excuse’ for not meeting the relevant deadline – the definition of a reasonable excuse has not changed. Given the high number of default surcharge disputes that have progressed to Tribunal in recent years, HMRC will be hoping that the new penalty regimes result in fewer taxpayer challenges.
If you are facing a VAT default surcharge or other VAT penalty, please get in touch.