A comprehensive guide to HMRCs VAT Penalty Regime

As the year-end approaches, businesses need to be aware of the changes for accounting periods starting on or after 1 January 2023 regarding VAT penalties and late submissions.

These changes include the introduction of a new penalty regime for late submission of returns and late  payments, the end of the Default Surcharge, and the harmonisation of Interest, with the introduction of Repayment Interest which will replace Repayment Supplement.

Within this article, we explore these areas more in-depth and outline the impact these changes may have on businesses.

An overview of the penalty changes

The new penalties cover late submission and late payment, and whilst initially applying to VAT, will also apply to Income Tax Self-Assessment (ITSA) from 2024. In addition there will also be changes to VAT interest to align more closely with the current ITSA and Corporation Tax Self-Assessment interest regimes. The new system is designed to be fairer and lenient towards individuals who occasionally make mistakes, while still imposing penalties on those who intentionally evade their responsibilities.

The late payment penalties will be charged at different rates based on when the payment is received, making them more proportionate to the length of time the payment is outstanding.

Late submission penalties

The new points-based system is the same across VAT and ITSA, with points accruing separately for the both of these. Taxpayers will receive a point for each late submission, and once a penalty threshold has been met, a fixed penalty of £200 will be issued, with another £200 for every subsequent late submission.

The threshold will vary according to the filing frequency.

Example – quarterly return

If you file your VAT returns quarterly, with the return for the quarter ended 30 April 2023 being late (1 point), followed by:

• the 31 July 2023 return being on time (remain at 1 point),
• and the 31 October 2023 and 31 January 2024 both being late (points 2 and 3),
• then again a late return for the quarter ended 30 April 2024 (4^th point),
• then the financial penalty of £200 will first be applied on the fourth late submission for the 30 April 24 VAT return.

Any subsequent late returns after this date would also have a £200 penalty applied (whilst the penalty points remain above 4).

One important point to note here is that, unlike with the old default surcharge regime where penalties were based on the percentage of the liability shown on the VAT return, the penalty is a fixed £200 regardless of the VAT liability and will therefore apply to both nil returns and returns where a repayment is due to the taxpayer.

Can points be removed?

Resetting multiple points

If a taxpayer has reached the penalty threshold total points can be reset to zero at any time provided the two conditions outlined below are both met:

1. Taxpayers must complete a period of compliance, i.e. submitting all returns on or before the due date. The compliance period is based on the return submission frequency, as identified in the table below:

Resetting individual points

If you have not reached the penalty threshold, then each individual point will automatically expire after 24 months.

Late payment penalties

The new late payment penalties are built around the idea that the sooner a taxpayer pays their liability, the lower the penalty rate will be.

There are now 2 late payment penalties:

The first penalty is based on a set percentage of the payment outstanding up to day 30, and the second penalty is calculated on amounts outstanding from day 31 until this is paid in full.

Period of familiarisation

HMRC have given taxpayers time to get use to the changes, meaning they will not charge a first late payment penalty until after 31 December 2023 if you pay in full, or agree a time to pay arrangement within 30 days of the payment due date.

Late payment/repayment interest

The following changes were made for VAT periods starting from 1 January 2023:

Those business which occasionally submit a VAT return or make a payment less than 15 days late will benefit from the new regime, as they will only face minor penalties and interest that is likely caused by mistakes or cash-flow related issues.

On the other hand, those businesses that are genuinely struggling due to the cost-of-living crisis and are unable to pay their VAT bills, the new regime may have an adverse impact. If they end up paying more than 30 days past their due date, the penalties they could incur could potentially cause major setbacks.

This article was written by Charlotte Page, a Senior Manager and VAT expert within Price Bailey. If you have any questions related to the new VAT Penalty Regime and how it will impact your business, please contact Charlotte using the form below.