New VAT Penalty Regime
For all VAT returns starting on or after the 1 January 2023, HMRC are introducing new penalty and interest regime for the submission of VAT returns and payment of VAT. Below we explain how the new regime will work for quarterly VAT returns, the first of which to be affected is for the quarter ending March 2023.
For late filings the previous surcharge is being replaced with a points system. This will apply to any late filing, including returns that are nil or have a repayment due.
HOW THE POINTS SYSTEM FOR LATE SUBMISSION WORKS
Any late filing, whether a day late or fifty, will incur one penalty point.
You will continue to receive an additional penalty point on each late submission until you reach the threshold.
Upon reaching this threshold you will receive a £200 fine.
Once at the threshold, every subsequent late filing will come with another £200 fine.
For quarterly returns, the threshold is 4 points. Therefore, in practice, you would have to submit four late returns to begin incurring penalties.
There are two instances where the late submission penalty rules do not apply:
A first VAT return after you have newly registered.
The final VAT return if VAT registration has bee cancelled.
Over time the points your business accrue can be removed. How this happens will depend on whether you are at the threshold or not.
HOW TO REMOVE PENALTY POINTS
If you are not at the threshold - A penalty point expires 24 months from the end of the submission month. For instance, if the return submitted late was due on the 7 May 2023, the point against this would expire 24 months from the end of May, on the 31 May 2025.
If you are at the 4-point threshold – You will need to meet the following two conditions:
Complete a period of compliance, submitting all VAT returns on time, for a 12-month period. The earliest this period can start is from the first month after the 4th penalty point. For example, if the fourth point was gained missing the 7 May deadline, the earliest the 12 month compliance period can start is the 1 June. If any returns are missed after the 4th point is incurred, the 12-month period resets.
Submit all outstanding returns from the previous 24 months.
At the point both conditions are met, all penalty points would be removed from the company.
Whilst you may not receive a penalty for every late submission, a late submission may result in late payment, which itself will incur a penalty. We will look at how this has changed next.
HOW LATE PAYMENT PENALTIES WILL WORK
The new regime has three stages, based on when you pay the outstanding amount, each with their own level of penalty. Remember, payment is always due by the submission deadline.
Payment up to 15 days late:
No penalty
Payment between 16 and 30 days late:
A penalty equal to 2% of the amount owed at day 15
Payment 31 days or more late:
A penalty equal to 2% of the amount owed at day 15
Another penalty equal to 2% of the amount owed at day 30
A daily rate of 4% annually on the outstanding balance. This is charged every day (starting at day 31) until settled
Remember, the sooner you pay, the lower the penalty will be. Also, as the penalty is calculated based on what is owed at a certain day, you may want to make part payments where possible to reduce the penalty.
Let’s look at a simple example to see how a late payment penalty looks at each stage.
Company X has a VAT liability on their May return of £10,000, they submit the return on time at the 7 July deadline, but do not make a payment:
If paid between 16 and 30 days late:
A penalty equal to 2% of the amount owed at day 15, which in this case would be 2% of £10,000 = £200
Payment 31 days or more late:
For this example, we will assume Company X pays 60 days late.
A penalty equal to 2% of the amount owed at day 15, which as calculated above equals £200
Another penalty equal to 2% of the amount owed at day 30 which in this case would also be 2% of £10,000 = £200
A daily rate of 4% annually on the outstanding balance. In this example it would be for 30 days, so (£10,000 x 4% x 30/365 days) = £32.88
Therefore, the total penalty will be £432.88
Don’t get caught out. Late payment penalties can occur on unsubmitted returns as well as submitted ones. HMRC will issue you a VAT assessment with an estimated liability, if you have not submitted a return. Payment on this is also subject to the late payment penalty.
To give companies a chance to adapt to the new scheme, HMRC will not be charging the payment penalty on days 16-30 until after 31 December 2023.
Finally, let’s look at late payment interest, charged by HMRC on any liability or penalty owed to them.
HOW LATE PAYMENT INTEREST WORKS
From the first day a payment is overdue, late payment interest will be charged. This applies to all the penalties previously been mentioned, as well as the VAT liability owed.
Charged every day, the interest is calculated at the Bank of England base rate + 2.5%.
Let’s again look at an example.
Company X, with their £10,000 liability, pay this 10 days after the deadline. For this example, we will be using a BoE base rate of 4.25%, which may fluctuate. This will make our late payment interest rate 6.75%.
Therefore, we have: £10,000 x 6.75% x 10/365 days, which gives us £18.49 interest.
Whilst there is a lot happening with this overhaul of the penalty regime, our main takeaway is that it is largely more forgiving. That being said, there are always steps that can be taken to mitigate any chance of penalties:
Keep your records regularly up to date. This will allow whoever reviews your VAT return to do so early in the month and will help to avoid any last minute rush.
If you don’t maintain your own records, get all your information over to whoever does as early as possible. This follows with the previous point and will allow a return to be reviewed and submitted as soon as it can be.
Never miss a payment by setting up a Direct Debit. You can do this by logging into your Government Gateway VAT account. The payment will usually come out a couple of days after the submission deadline.
Set up a holding account where you can set aside the VAT you owe. You can then be sure you’ll always have the funds available to pay the liability on time.
FUSE is an independent Chartered Certified firm of accountants and tax advisors based in Highgate Village, North London. We provide a dynamic range of services to clients working in property, media, entertainment and professional services. Our clients vary in size from self employed sole traders, small enterprises and medium size businesses. We believe that comprehensive financial planning and sound business financial advice are the keys to growth and profitability.
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