Master the new VAT penalty regime
Chris Campbell, Head of Tax at ICAS, gives you a refresher on the new VAT penalty regime from January 2023 for late VAT returns and payments.
How will the new rules affect the penalty charged for late VAT returns?
For VAT return periods starting on or after 1 January 2023, HMRC introduced new rules for VAT-registered businesses who submit VAT returns late.
The points add up
VAT-registered businesses will now receive a penalty point for each occasion that they submit 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.
These penalties will be charged once the following penalty thresholds have been reached:
Frequency of VAT return submissions
Annual VAT returns
Quarterly VAT returns
Monthly VAT returns
Once the relevant penalty threshold has been reached, the VAT-registered business will receive a £200 penalty. And 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.
A VAT-registered business can reset its penalty point tally, and reduce its accrued penalty points, to zero. However, this can only happen if HMRC has received all outstanding VAT returns for the previous 24 months, and the business consistently submits its VAT returns on time for 24 months (in the case of businesses submitting VAT returns annually), 12 months (quarterly VAT returns), or 6 months (monthly VAT returns).
Penalties and interest for late VAT payments from January 2023
For VAT return periods starting on or after 1 January 2023, late VAT payments will attract both penalties and interest.
HMRC will charge interest from the day the VAT payment is due up until the payment is made in full, even where the business has a Time to Pay (TTP) arrangement in place. This will be calculated at Bank of England base rate plus 2.5%.
If the business repays the outstanding VAT within 14 days of the due date, no late payment penalty will be charged. After that, a penalty of 2% of the VAT outstanding at day 15 will be charged, 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.
If the VAT-registered business applies for a TTP arrangement by day 15, this will have the effect of there being no late payment penalty. It’s the application that must be made by day 15, not HMRC’s approval.
However, the penalty suspension under a TTP arrangement will only remain as long as the business follows the conditions of the TTP arrangement. It’s vital that payments made under a TTP arrangement are made in line with the agreement. Missing even one agreed payment under the TTP arrangement could result in full penalties being charged, despite previous timely payments.
As well as above changes, HMRC replaced repayment supplement for VAT return periods beginning on or after 1 January 2023.
Interest will now be paid from the day after the due date or submission date (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%.
Easing into the new penalty regime
To ease VAT-registered businesses into the new regime, HMRC has advised that it won’t 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’s 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.
Challenges for tax agents regarding VAT penalty notices
Since the new penalties have been issued, an issue has come to light regarding VAT penalty notices to customers who file or pay their VAT late. Instead of a letter tailored to the agent, they will instead receive identical copies of any notices issued to their clients. But, due to recent GDPR concerns, what HMRC send looks like it’s the agent receiving the penalty, rather than the client.
This is not an ideal situation, and it has caused confusion, especially when the issue first happened as the first penalties were issued in the Spring. Along with the other professional bodies, we’re giving feedback to HMRC on this to help find a solution. It’s important to be aware of the problem until letters can be correctly addressed and clients identified.
If you work in practice and receive one of these notices, you can check which client the notice refers to by checking the VAT registration number (VRN) on the notice. Using the VRN, you can also view your client’s position by accessing the agent services account.