New VAT Penalty Regime from January 2023 – Updated Guidance

A new penalty regime for VAT returns has now been introduced for all VAT periods starting on or after 1 January 2023 which replaces the default surcharge system.

As HMRC have now issued their full guidance on how the new penalties will be calculated, we have highlighted the key takeaways from their guidance, which you can find here: https://www.gov.uk/government/collections/vat-penalties-and-interest

LATE SUBMISSION

For each VAT return submitted late a business will receive one late submission penalty point.

Once a penalty threshold is reached, the business will receive a £200 penalty and a further £200 penalty for each subsequent late submission; but as with other tax penalties, a business will not be liable to a point or penalty if they have a reasonable reason for not submitting a VAT return by the deadline.

The late submission penalty points vary according to the VAT return submission frequency.

Example:

A business submits their VAT returns quarterly which means their penalty points threshold is 4. They have submitted 3 returns late which means they have 3 points. If they submit their next return late they will incur a further penalty point and will reach the threshold of 4. A £200 penalty will then be issued. If they submit their next return on time their penalty threshold will remain at 4. If their next return is submitted late the business will receive another £200 penalty.

There is the ability for a business to be able to reset their points back to zero, which is if:

• all returns are submitted on or before the due date for the period of compliance — this will be based on the submission frequency
• when points are accrued but do not reach a penalty threshold the points will expire after 2 years

HOW DOES THIS WORK WHEN I CHANGE MY ACCOUNTING PERIOD?

If a business changes their accounting period and has existing penalty points their existing points will be adjusted as below:

If you take over a VAT registered business as a transfer of going concern any penalty points built up by the business will not be transferred.

ARE THERE ANY EXCEPTIONS?

There are some cases which the late submission penalty points do not apply to, which are listed below:

• the first VAT return if a business is newly registered
• the final VAT return after a business cancels the VAT registration
• one-off returns that cover a period other than a month, quarter, or year

LATE PAYMENT

For late payment penalties, the sooner the liability is paid the lower the penalty rate will be, so below we have detailed these varying rates under the new VAT penalty regime:

• Up to 15 days overdue – A business will not be charged a penalty if the VAT owed is paid in full or a payment plan is agreed on or between days 1 and 15.
• Between 16 and 30 days overdue – A first penalty will be calculated at 2% on the VAT owed at day 15 if the liability is paid in full or a payment plan is agreed on or between days 16 and 30.
• 31 days or more overdue – A first penalty will be calculated at 2% on the VAT owed at day 15 plus 2% on the VAT owed at day 30.
• A second penalty will be calculated at a daily rate of 4% per year for the duration of the outstanding balance, and this is calculated up to the date when the outstanding balance is paid in full or a payment plan is agreed.

If a business is unable to fully settle any liability they should contact HMRC as soon as possible to arrange a payment plan, if accepted this could mean lower or no interest charge will be due.

INTEREST

Interest will be charged on late payments from the day the payment is overdue to the day the payment is made in full. The interest will be calculated as the Bank of England base rate plus 2.5%.

If you are in VAT group then please ask for further information as to how the penalties will apply when a company joins or leaves a VAT group.

If you have any questions on the new VAT penalty regime or any of the subjects discussed, then please get in touch! You can call on 01243 782 423 or head to our contact form.

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