VAT Penalty Changes

27 February 2023

HMRC makes changes to the way it applies VAT penalties

HMRC has written to 2.5 million businesses to update them on the new points-based penalties for late VAT returns. VAT Penalty changes are on their way.

Why have HMRC changed their VAT penalty system?

HMRC have reviewed the way they apply penalties and they believe the new points-based system will be fairer and more proportionate to businesses who submit their VAT returns late or pay their bills late.

Their overall aim is to replace the default surcharges with a system that helps to correct issues before penalties are applied whilst ensuring occasional errors don’t receive the same penalty as those that make regular errors.

When do the VAT Penalty changes commence?

The first monthly returns and payments affected by the penalties are due by 7 March 2023.

However, there will be a soft landing period for VAT Penalty changes so if a business misses a payment and resolves the outstanding debt within 30 days or sets up a repayment plan the penalty will be waived.

How does the points-based system work?

The late payment and points-based late submission penalties were introduced from 1 January 2023, replacing the VAT default surcharge, and apply to accounting periods which start after that date.

For late submission penalties, all taxpayers will start on zero points. This includes those on a default surcharge. Any taxpayer who is on a default surcharge will still be liable to pay any associated charges already received.

The penalties for late VAT returns also apply to businesses that submit nil returns and repayment returns. Changes have also been made to how interest is calculated.

In future, late submission penalties will work on a points-based system. For each VAT return submitted late, taxpayers will receive a penalty point until they reach the penalty point threshold, at which stage they will receive a £200 penalty.

A further £200 penalty will also apply for each subsequent late submission while at the threshold, which varies to take account of monthly, quarterly and annual accounting periods.

If a VAT payment is more than 15 days late, businesses will pay a first late payment penalty. If the VAT payment is more than 30 days overdue, the first late payment penalty increases and a second late payment penalty will also apply.

How flexible will HMRC be with VAT Penalty changes?

To help taxpayers get used to the changes HMRC will not charge a first late payment penalty on VAT payments due on or before 31 December 2023, if businesses either pay in full or a payment plan is agreed within 30 days of the payment due date.

HMRC will help businesses that cannot pay their VAT bill in full with arrangements to set up a payment plan to pay VAT bills in instalments.

After 31 December 2023, if a taxpayer proposes a payment plan within 15 days of payment being due and HMRC agrees it, they would not be charged a late payment penalty, provided that they keep to the conditions of the payment plan.

Late payment penalties can apply where proposals are made after the first 15 days, but the agreement of the payment plan can prevent them increasing.

What are the penalties?

HMRC has introduced both late payment and repayment interest, which will replace previous VAT interest rules. This brings the new regime in line with other taxes. Late payment interest is charged from the day after the taxpayer’s VAT payment is due until the day it is paid in full. It is calculated at the Bank of England base rate plus 2.5%, currently 6.5%.

The first late payment penalty is calculated as:

  • 2% on the VAT owed at day 15 – for VAT payment between 16 and 30 days overdue;
  • 2% on the VAT outstanding at day 15, plus 2% of what is still outstanding at day 30 – for payment 31 days or more overdue.

The second late payment penalty is then calculated at a daily rate of 4% per year on the outstanding balance and charged daily from day 31 until the outstanding balance is paid in full.

Read more on HMRC’s website.

Need help with your VAT returns?

Running a business is hard work but our team are on hand to support clients with all your VAT and accounting needs. Book your free consultation, in person or on the phone, so we can understand your requirements a little more and you can find out more about BAS.

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