VQOTW: Upcoming changes to VAT penalties & VAT interest charges
I My client has submitted her VAT return late again and knows that a Default Surcharge would normally be applied to her account.

However, she has read somewhere that HMRC have changed the penalty regime for late submission & payment; is this correct?

If so, when will the changes take effect and what will this mean for my client?

Your client is correct about imminent changes. The new VAT penalty regime was due to be introduced for VAT return periods beginning on or after 1 April 2022, bringing VAT more closely in line with existing penalties which apply to direct tax returns, but introduction has now been deferred until January 2023. The delay is to enable HMRC extra time to make the necessary changes to their systems.

Currently there is no standalone late submission penalty for VAT; however, a Default Surcharge applies, which combines both late submission and late payment sanctions. On the first late return, a Surcharge Liability Notice (SLN) is issued which lasts for 12 months. If further defaults occur, the SLN period is extended and penalties of up to 15% of the tax due are levied, depending on the number of defaults.

The New Penalty Regime for Vat returns – periods starting on or after 1/1/23

Under the proposed changes, there will be a two-tier penalty system.

Firstly, there will be a late submission penalty:

– HMRC will issue a single penalty point for a late submission of a VAT return and once the business has exceeded a points threshold for multiple missed returns a flat penalty of £200 will be imposed for each late return.

The regime introduces a ‘standalone’ late submission penalty using a points-based system, depending on how often VAT returns are submitted. The system has been designed to penalise those who frequently file late returns, offering more leniency to those who make the occasional late submissions, thus making the system fairer.

The penalty thresholds will be as follows:

Submission Frequency Penalty Threshold
Annual 2 points
Quarterly 4 points
Monthly 5 points

 

Points can be reset to zero by submitting all returns by the due date for a set period, which will mean: 24 months for annual filers, 12 months for quarterly filers and 6 months for monthly filers. AND must have filed all outstanding returns to HMRC for the previous 24 months.

Taxpayers will have one points total for each submission obligation they have.

For example, if a taxpayer is required to provide an annual ITSA return and quarterly VAT returns, they will have separate points totals for ITSA and VAT. If both returns are late, a point will be applied to the points total to which the return relates — one for the group of annual returns for the late ITSA return, and one for the group of quarterly returns for the late VAT return.

If both returns had an annual submission frequency, there would still be two separate points totals, one for ITSA and one for VAT, and the taxpayer would incur a single point for each if both returns were late.

Secondly, introduction of a two-part penalty system for late payments, so the sooner the VAT is paid, the lower the penalty rate will be charged. Late payment of tax due to HMRC, is calculated on the amount of tax outstanding and how long the late payment is overdue.

–          The first charge will be imposed at 2% of the outstanding tax if the tax due on a return remains unpaid 15 days after its due date.
If any of this tax is still unpaid after 30 days, the penalty increases to 4% of the tax still outstanding at that point.

If a ‘time to pay’ is agreed, the penalty will stop accruing from the date the proposal is submitted by the taxpayer.

–          The second charge is a daily penalty (set at 4% per year on the outstanding amount) starting from 31 days after its due date until the business pays the tax that is due.

HMRC have given a period for taxpayers to familiarise themselves with the new system and will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if paid in full within 30 days of the payment due date.

Further details are available and can be found on the following link: https://www.gov.uk/guidance/prepare-for-upcoming-changes-to-vat-penalties-and-vat-interest-charges

 

 


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Rachel worked as a HMRC VAT Compliance caseworker for 16 years, having previously worked for a year as an investigator on the Joint Shadow Economy Team.

Her main role was visiting a wide variety of businesses within the Small & Medium Enterprise, but included a range of other duties including cross tax working, fraud and evasion referrals. Rachel was also involved in presenting Alternative Dispute Regime cases and carrying out VAT repayment credibility checks.

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