We thought it important to update our VAT registered clients of the new penalty and interest regime that started for VAT periods commencing on or after 1 January 2023.

The new regime replaced the VAT default surcharge system, which penalised late VAT submissions and/or late payments as a single penalty.  Separate penalties will now be levied on late VAT return submissions and for late payments of VAT due.  Interest will be applied separately to the penalties.

These new penalties have the potential to be sizeable and numerous for defaulters and, unlike the old penalty system, it is critical to note that these changes apply to everyone who submits VAT returns, including a nil or repayment return.

In an ideal world, all VAT returns and payments would be made on time but, if for any reason, you believe your business will struggle to make a submission or payment, we would be happy to assist you with plans to help mitigate the potential penalties incurred.  It is also critical for those clients that we assist with book-keeping and VAT return filings, that the information is provided to us in good time in order to meet each VAT deadline.

Late submission and failure to submit returns

A business that fails to submit a VAT return on time, a penalty point will be awarded to the business by HMRC.

When the number of penalty points reaches a penalty threshold, a financial penalty of £200 will be issued.

There are different penalty thresholds depending on whether the business submits its returns monthly, quarterly or annually:

Points expire from the business’s record after two years from the month after the failure to submit occurred. There are different conditions that apply when a company has reached the penalty threshold requiring a period of compliance and that all submissions due for the preceding 24 months have been submitted.

HMRC should issue the business a notice of an award of each penalty point incurred and it is possible to appeal a penalty issued if there is reasonable excuse for a late submission.

Late payment penalty

Late payment penalties apply to payments of VAT (except for payments on account and Annual Accounting instalments) not paid in full by the due date.  For late payment penalties, the sooner the payment is made the lower the penalty amount will be.

• Payments made within 15 days of the due date will not incur a late payment penalty.
• Penalty 1 – payment made with 16 and 31 days of the due date, the penalty is 2% of the amount unpaid at day 15.
• Penalty 2 – payment is 31 or more days overdue, the first late payment penalty increases (2% of the amount unpaid at day 15 plus 2% of the amount unpaid at day 31) and a second late payment penalty is assessed. The second penalty is a daily charge of 4% per year on the unpaid amount from day 31 until paid.

If the business is experiencing difficulty in paying a VAT liability, HMRC can be approached for a Time To Pay (“TTP”).  This could mean lower or no penalties (if agreed by day 15) on the unpaid amount.

Details on how to make a TTP arrangement can be found at:

www.gov.uk/guidance/find-out-how-to-pay-a-debt-to-hmrc-with-a-time-to-pay-arrangement

HMRC have advised that a 12 month period of familiarisation will be given as the new regime beds in.   The first late payment penalty will not be charged until after 31 December 2023. This is provided that, within 30 days of the payment due date, it is either paid in full or a TTP arrangement is put in place.  If the conditions of a TTP arrangement are broken at any point, it may be cancelled. If this happens HMRC would charge both first and second late payment penalties as if the TTP arrangement never existed.

Similar to the late filing penalty, it is possible to appeal a penalty issued if there is a reasonable excuse for the late payment.

Late payment interest and repayment interest

HMRC have also taken the opportunity to update the interest applied to amounts of VAT and penalties overdue and in respect of VAT refunds.  Interest is separate and additional to the above penalties.

Late payment interest will be applied from the day the debt falls overdue until it is paid. The rate of interest applied is 2.5% over the Bank of England base rate. Currently this is 6% (2.5% + 4%) on an annual basis.

For VAT repayments, the interest rate applied is 1% below the Bank of England base rate subject to a minimum rate of 0.5%. Currently this is 1.5% (2.5% – 1%) on an annual basis.

Further guidance on the new penalty regime can be found at HMRC website:

www.gov.uk/government/collections/vat-penalties-and-interest

If you have any queries concerning the new VAT penalty regime or any other VAT issues, please do not hesitate to contact us.