New VAT Penalty regime
From 1 January 2023 a new penalty system applies for both late VAT return submissions and late payments. It also applies to other taxes although our focus is VAT. It was originally intended that these changes would take effect from 1 April 2022 but it was announced in January 2022 in a Written Ministerial Statement that planned reforms of the VAT penalties and interest regime for late filing and payment would be delayed as extra time was needed to update HMRC’s IT systems.
The intention behind the new system is to be fairer. It achieves this by penalising the few taxpayers who persistently fail to meet submission obligations rather than those who make occasional mistakes. It is important to note that one impact of the new regime is that repayment traders will also potentially be liable to penalties if they submit their returns late.
The new penalty regime is described as being akin that used in relation to traffic offences in that it is ‘points based’. Points will be given when a business defaults and when a certain number of points have been incurred penalties will apply.
Details of how the new late submission penalty system operates can be found on HMRC’s website. However, the main points to note are summarised below.
Taxpayers will receive a point every time they miss a submission deadline. HMRC will notify them of each point. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The threshold is determined by how often a taxpayer is required to make their submission.
When a taxpayer has reached the relevant threshold, as determined by their submission frequency, a penalty will be charged for that failure and every subsequent failure to make a submission on time, but their points total will not increase.
The penalty thresholds are as follows:
|Submission frequency||Penalty threshold|
Points have a lifetime of two years; after which they expire. This is calculated from the month after the month in which the failure occurred. Points will not expire when a taxpayer is at the penalty threshold. This ensures they must achieve a period of compliance to reset their points.
After a taxpayer has reached the penalty threshold, all the points accrued within that points total will be reset to zero when the taxpayer has met both the following conditions:
- A period of compliance (that is, meeting all submission obligations on time for the period of compliance – see table below); and
- The taxpayer has submitted all the submissions which were due within the preceding 24 months. It does not matter whether or not these submissions were initially late.
Both requirements must be met before points can be reset.
The periods of compliance are:
|Submission frequency||Period of compliance|
|Quarterly (including MTD for ITSA)||12 months|
If a taxpayer is at the penalty threshold and has achieved the period of compliance, but has outstanding submissions, they will remain at the penalty threshold and continue to be charged penalties for any further failures to make submissions on time.
Once a taxpayer has reached the relevant threshold and a penalty has been charged, every subsequent late submission will incur a penalty, but the taxpayer’s points total will not increase.
The new Late Payment Penalties apply to payments due from VAT registered businesses. Details of how this system operates can be found on HMRC’s website. The new system has replaced the Default Surcharge, which used to serve as a combined late submission and late payment sanction, effectively meaning that only payment businesses were likely to be penalised for failing to submit VAT returns in a timely manner. The separation of the two penalties under the new regime means a business can be penalised if it is late submitting a VAT return that records a payment due from HMRC (a repayment return), this would not previously have been the case.
There are two late payment penalties that can be applied:
First Penalty for late payment
The taxpayer does not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. If tax remains unpaid after Day 15, the taxpayer incurs the first penalty. This penalty is set at 2% of the tax amount outstanding after Day 15. Between days 16 and 30 the taxpayer will receive a first penalty calculated at 2% on the VAT owing at day 15 plus 2% on any VAT still owing at day 30.
Additional or Second Penalty for late payment
If tax remains unpaid on Day 31, the taxpayer will begin to incur an additional penalty on the tax that remains outstanding. It accrues on a daily basis, at a rate of 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the tax that is due.
Reviews and appeals
Taxpayers are able to challenge a point or penalty through both an internal HMRC review process and an appeal to the courts (the First Tier Tax Tribunal).
The grounds for an appeal include the grounds that the taxpayer had a reasonable excuse for missing a filing deadline. The appeals process is the same as that for a VAT assessment.
Alongside the introduction of new penalties HMRC has changed the interest regime for VAT to ensure interest is consistently and automatically charged and paid in all cases where amounts are paid late or where amounts have been overpaid, bringing VAT in line with other tax regimes.
From 1 January 2023 HMRC charges Late Payment Interest (LPI) on tax that is outstanding after the due date, irrespective of whether any Late Payment Penalties (LPPs) have also been charged. The LPI will apply from the date the payment was due until the date on which it is received by HMRC. LPI is calculated as simple interest at a rate of 2.5% + the Bank of England base rate.
Where a taxpayer has overpaid tax, HMRC will pay Repayment Interest (RPI) on any tax due to be repaid (the difference between the amount due and the amount paid) either from the last day the payment was due to be received or the day it was received, whichever is later, until the date of repayment. RPI will be paid at the Bank of England base rate less 1% (with a minimum rate of 0.5%).
Payment of RPI replaces the repayment supplement previously paid when HMRC does not make a repayment within 30 days. There are concerns that this could lead to delays in HMRC making repayments as the financial impact for HMRC will be less. HMRC has stated that action has been taken to ensure that the repayment team continues to make repayments promptly and within the time-limits wherever possible.
These new penalties are a significant change to the VAT system. If you wish to discuss the impact on your business please contact us.