Expert Opinion: The new VAT penalty regime explained

As of January 2023, a new penalty regime came into effect for late VAT filing and payments. Stockport accountants, Hallidays, part of the Xeinadin group, explain how the system works to make sure your business doesn’t fall foul.

VAT is one of the most important sources of revenue for the Government, representing 17.7% of all receipts and raising over £156 billion – more than the entire annual NHS budget. So it should come as no surprise that HMRC take an increasingly severe view of non-compliance.

These consequences go way beyond the obvious penalties and interest charges nowadays – companies that don’t meet the basic VAT requirements risk grave damage to their corporate reputation and restrictions on doing business. And in from this month (January 2023), a new, even more complex penalty regime comes into force.

The new penalty regime

The new penalty regime was deferred to 1 January 2023 to give taxpayers time to migrate to the new MTD (Making Tax Digital) regime (and for HMRC itself to get its IT in order).

The new system treats late filing and late payment differently.

Late filing penalties

HMRC will operate a “totting-up” points system (which may be familiar to motorists) for late filing of VAT returns. Businesses will accrue one penalty point each time they’re late submitting their VAT return, and will be penalised when they breach the limit.

The limit varies depending on how often VAT returns are required to be submitted, and are set as follows:

• Monthly Submission – 5 points;
• Quarterly Submission – 4 points;
• Annual Submission – 2 points.

If you don’t reach the limit, your points will expire after two years, starting from the month after the one in which your late filing occurred.

If the limit is reached, your points won’t expire until you meet both of the following conditions:

1. You complete a specific period of compliance without a late submission – this is set at:
   • 6 months for monthly submissions
   • 12 months for quarterly submissions
   • 24 months for annual submissions

2. You’ve correctly filed your VAT returns for a period of 24 months, whether they were submitted late or not.

Late payment penalties

Under the new regime, there is a 15-day initial grace period where you won’t be penalised for late payment if you pay in full within 15 days after the submission deadline.

Once the grace period ends, you’ll be liable for a first penalty of 2% of the total tax outstanding.

If the tax is still unpaid after 30 days, the penalty increases to 2% of the tax outstanding at day 15 plus 2% of the tax outstanding at day 30 (in most cases, this will total 4% of the late tax).

After Day 31, any tax still unpaid will trigger a further penalty of 4% per year, accrued daily.

Any history of previous late payment will not be taken into consideration when charging these late payment penalties. However, if you have a reasonable excuse for a late payment and explain it to HMRC before the late penalties are charged, they will consider it and may waive the penalties.

If you’re in difficulties, you will be able to request Time-to-Pay (TTP) arrangements, which will stop the charges accruing any further from the date you contact HMRC to agree a payment schedule. However, they will not agree a TTP arrangement if you request it after day 30 and there is still tax unpaid if at that date – the additional penalty will start accruing from Day 31.

Regardless of any late payment penalties charged, a late payment simple interest at a rate of 2.5% plus the Bank of England base rate will be charged on any tax outstanding after the due date.

Continue reading on the Xeinadin Group website.