HMRC introduces new VAT penalty regime from January 2023
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
3 November 2022
Chris Campbell considers changes to the VAT penalty regime for late VAT returns and VAT payments from January 2023
What is changing from January 2023?
Alongside the move to Making Tax Digital (MTD) and the need for VAT registered businesses to submit VAT returns using MTD compliant software from November 2022, HMRC is introducing a new penalty regime from January 2023 where VAT returns are submitted late or VAT is not paid by the due date. The new penalty regime will apply for VAT return periods starting on or after 1 January 2023.
At present, where a VAT registered business does not submit its VAT return on time and the amount due on that return is not cleared funds in HMRC’s bank account by the due date, it is subject to the default surcharge regime.
A VAT registered business in default will currently progress through the default surcharge regime, although no surcharge will be due where there is no VAT payable or a repayment is due. The percentage used for the default surcharge (ranging from 2% to 15%) will vary based on the number of defaults within the 12 month surcharge period. A more lenient system is currently in place for businesses with a turnover less than £150,000, with those businesses being given more information and support in order to help them become more compliant.
Whilst there are always advantages and disadvantages of any particular system, the default surcharge regime otherwise treats all VAT registered businesses the same, so it can appear to be more punitive in nature for those businesses who may have missed only an occasional deadline.
The new penalty system from January 2023 will adopt a penalty point approach for both late submission and late payment in an apparent attempt to apply a level of penalty that is proportionate to the extent of the non-compliance with the VAT legislation.
How will the new rules affect the penalty charged for late VAT returns?
Under the new scheme for VAT return periods starting on or after 1 January 2023, a VAT registered business will receive a penalty point for each occasion that it submits a VAT return late. Once the business reaches a set number of penalty points (determined by the frequency of VAT return submissions), penalties will be charged by HMRC.
Penalties will be charged once the penalty thresholds have been reached as follows:
Annual VAT returns 2 points
Quarterly VAT returns 4 points
Monthly VAT returns 5 points
Once the relevant penalty threshold above has been reached, the VAT registered business will receive a £200 penalty. Although no further penalty points will be added, an additional £200 penalty will be charged for each subsequent late submission. There are special rules covering where a VAT registered business changes the submission frequency of its returns whilst within the penalty regime.
It will be possible for a VAT registered business to reset its penalty point tally and reduce its accrued penalty points to zero. However, this will only happen if HMRC has received all outstanding VAT returns for the previous 24 months and the business has submitted its VAT returns on time for 24 months in the case of businesses submitting VAT returns annually, 12 months for businesses submitting VAT returns quarterly, or 6 months for businesses submitting VAT returns monthly.
What penalties and interest will be charged for late VAT payments in future?
For VAT return periods starting on or after 1 January 2023, late VAT payments will attract both interest and penalties.
HMRC will charge interest from the day the VAT payment is due up to the date of payment in full at a rate of interest of Bank of England base rate plus 2.5%, even where the business has a Time To Pay (TTP) arrangement in place.
No late payment penalty will be charged where the VAT is paid within 14 days of the due date. Thereafter a penalty will be charged at 2% of the VAT outstanding at day 15 and a further 2% of the VAT outstanding at day 30. Daily penalties at a rate of 4% per annum will then be charged from day 31 until the VAT is paid in full.
Where the VAT registered business applies for a TTP arrangement by day 15, this will have the effect of there being no late payment penalty charged. It is important to stress that it is the application that needs to be made by day 15, as opposed to the approval by HMRC.
The suspension of a penalty where there is a TTP arrangement will only remain as long as the business adheres to the conditions of the TTP arrangement. As such, the importance of ensuring that payments made under a TTP arrangement are made in line with the agreement cannot be understated. Missing even one agreed payment under the TTP arrangement could result in full penalties being charged, even where all previous instalments have been paid on time.
What will happen in respect of repayment interest?
Alongside the above changes, HMRC will also be withdrawing repayment supplement for VAT return periods beginning on or after 1 January 2023. HMRC will instead pay repayment interest from the day after the due date or the date of submission (whichever date is later) until the repayment is made.
This will be at a rate of the Bank of England base rate minus 1%, subject to a minimum rate of 0.5%.
Will there be any form of ‘soft landing’ under the new penalty regime?
To allow VAT registered businesses to become familiar with the new regime, HMRC has advised that it will not charge a first late payment penalty during 2023, provided that businesses pay in full within 30 days of the payment due date.
In times of increasing interest rates, this may be welcome by VAT registered businesses as they manage their cash flow. But it is important to remember that late payment interest is payable from day one, at a rate of interest linked to the Bank of England base rate.
Next steps
ICAS would recommend that Members make VAT registered clients aware of the new VAT rules and penalties so that they can consider how they may affect their business. There will be businesses who may no longer receive a penalty but would have done under the default surcharge regime, but others who may receive less in repayment interest than they would have received in repayment supplement (although this will depend on movements in the Bank of England base rate over the coming months).
Let us know your views
If you have any feedback on the new VAT penalty regime and how it applies in practice, ICAS would be pleased to receive it. We welcome Members’ input to inform our work on consultations or other tax-related matters – email tax@icas.com to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by Members.