With the transition to Making Tax Digital (MTD) and the need for VAT-registered firms to file VAT returns using MTD-compliant software starting in November 2022, HMRC is implementing a new penalty system beginning in January 2023 for late or unpaid VAT returns.
The new penalty system for VAT will be introduced from January 2023 rather than April 2022, which is a much-welcomed change given the decreased penalty. Presently, a VAT-registered business is still subject to the default surcharge regime if its VAT return is not submitted and VAT dues are not paid on time. When there is no VAT due or repayment is given, there will be no surcharge.
Depending on how many defaults occur throughout the 12-month surcharge period, 2% to 15% will be used as the default surcharge percentage. Businesses with a revenue of less than £150,000 now operate under a more liberal regime, receiving more guidance and assistance to help them become more tax-compliant.
Effects of Submitting VAT Returns Late Under New Rules
When a VAT return is late, HMRC will tally points for that failure. A fixed and maximum £200 fine will be applied if the total number of points exceeds the applicable threshold for every late submission of VAT returns. This is much lower than the previous late filing penalty, although the more businesses delay paying fines, the bigger the penalty can accumulate.
A penalty will be charged when the total points equal these thresholds:
- Annual VAT returns: 2 points
- Quarterly VAT returns: 4 points
- Monthly VAT returns: 5 points
Once HMRC imposes a penalty, the accrued penalty points will only go away after some time. Businesses will then need to pass a test of a reasonable compliance period, which will vary depending on the return cycle, and submit any unfiled returns due in the previous 24 months to restart the clock.
Good compliance periods are as follows:
- Annual VAT returns: 24 months
- Quarterly VAT returns: 12 months
- Monthly VAT returns: 6 months
New Late Payment Penalty System
The earlier the fine is paid, the less the consequential cost will be. The severity of the penalties depends on how long the payment is past due:
15 days overdue
If the VAT is paid in full or a payment schedule is arranged on or between days 1 and 15, there will not be a penalty.
Between 16 and 30 days overdue
If they paid in full or agree to a payment plan on or between days 16 and 30, HMRC will collect the first penalty, which is set at 2% of the VAT they owe on day 15.
31 days or more overdue
The initial penalty increases to 4% if the tax is unpaid after 30 days. The second penalty is assessed at 4% annually and calculated daily from day 31 until the tax is paid.Even when granted a time-to-pay arrangement, interest on past-due taxes will continue to be imposed and accumulate. Late payment interest is calculated just as the Bank of England’s base rate with an additional 2.5% since HMRC bases its increase of interest rate from BOE’s changes. If a company has overpaid taxes, interest on the amount refunded will be calculated at the Bank of England’s base rate of less than 1%.
Familiarisation period by HMRC
HMRC has announced that it will not impose a first late payment penalty during 2023, providing that firms will make a complete payment within 30 days of the payment due date. This is being done to give VAT-registered businesses time to get accustomed to the new system.
HM Revenue & Customs. 2022. ‘Prepare for Upcoming Changes to VAT Penalties and VAT Interest Charges’, GOV.UK (GOV.UK): https://www.gov.uk/government/collections/vat-penalties-and-interest
Adnan, Omair. 2022. ‘New Late VAT Penalties | AJN Accountants’, AJN Accountants: https://ajnaccountants.co.uk/
Porter, Steven. 2022. ‘The New Late Filing and Late Payment Penalty Regime for UK VAT and Other Taxes’, Pinsent Masons (Pinsent Masons): https://www.pinsentmasons.com/out-law/guides/new-filing-late-payment-penalty-regime-uk-vat