New VAT Penalty Regime
With effect from 1 January 2023, HMRC introduced a new VAT penalty regime which replaced the old default surcharge regime. This is in respect of late filing and payment of VAT returns liabilities. The new penalty regime will apply to all VAT return periods after 1 January 2023. The new penalty regime is made up of two new penalties. This includes the Late Filing Penalty which specifically targets late VAT return submissions, and Late Payment Penalty which is targeted at late payments of liabilities arising from VAT returns commencing on, or after 1 January 2023.
How does the new VAT penalty regime operate?
The new penalty regime works on a points-based system, with the points accrued ultimately leading to financial penalties.
Late Filing Penalty
For each VAT return filed late, a VAT registered business will receive one point. When the maximum threshold has been reached HMRC will issue a £200 penalty. The applicable threshold will depend on the frequency over which VAT returns are submitted.
|Frequency of VAT returns||Maximum Points threshold||Expiry period|
|Monthly returns||5||6 months|
|Quarterly returns||4||12 months|
|Annual returns||2||24 months|
Under the new penalty regime, taxpayers who only submit repayment VAT returns (repayment traders) or nil returns, will also have this new Penalty applied to them. This a big change from the old default surcharge regime. The points will stay on the VAT registered business’ records for a period of 24 months (two years).
All points accrued will then be wiped from the VAT registered business’ records once the points are 24 months old. This is the case, provided that in the period, the relevant maximum threshold of points has not been breached. If the maximum threshold was reached, in order to get the points wiped, the VAT registered business would need to demonstrate that following the breach, it had remained compliant in its liability to submit VAT returns on time. This must have been throughout an agreed period, which would be determined by the frequency of its VAT returns. For example, if a 4-point threshold is breached and a Penalty of £200 issued, the VAT registered business must ensure all of its VAT returns for the next 12 months are submitted on time. otherwise a further £200 Penalty will be issued for each late VAT return.
Late Payment Penalty
The new penalty regime will impose late payment penalties in circumstances where the liability owed on a VAT return remains unpaid, in full, by the end of the 15th day following the due date for payment.
For example, a March quarterly VAT return would be due for payment by close of play on 7 May. Under the new penalty regime, provided the liability has been paid by close of play on 22 May, there will be no penalty charged. If a proportion of the liability remains outstanding after 22 May, a late payment penalty will apply from the 16th day following the due date for payment (23 May).
|Number of days after due date||Penalty|
|1 – 15 days||Nil|
|16 to 30 days||2%|
|More than 31 days||4%|
In addition, interest would be charged on the outstanding amount until it is eventually paid off in full. HMRC have confirmed that with effect from 6 January 2023, the default interest payable would be charged at a rate of 6% and would be charged on late payments from day one.
Why does this matter?
It remains important that all VAT returns are submitted on time. Any liability due on them must be paid in full, where possible. This is because the new VAT penalty regime has changed the rules in respect of the penalty chargeable for late payment of VAT liabilities. For instance, a fundamental difference from the old default surcharge regime is that, under the new penalty regime, taxpayers who only submit repayment VAT returns, or Nil VAT returns will equally be liable to be penalised if they are in default, despite there never being any potential revenue loss.
The new penalty regime is designed to be fairer. It should not penalise taxpayers who may fall a few days late because of banking issues, or an oversight of the diary. It is instead, designed to penalise persistent offenders.
HMRC will continue to accept reasonable excuse appeals penalties for defaults. With no penalty points being issued where the reasonable excuse appeal is accepted. It is felt however, that such appeals would be less necessary. This is because occasional slips in filing VAT returns on time, or in the paying of the liability due on them fractionally late, will generally not lead to a penalty.
Taxpayers within the old default surcharge regime should have received written confirmation from HMRC that at commencement of the new Penalty regime, their Surcharge Liability Notice period would come to an end, and that they would come under the new Penalty points system.
Taxpayers struggling with cashflow issues and unable to pay the liability due on the VAT returns they submitted by the due date, should be able to enter into time-to-pay arrangements with HMRC. This will enable them to avoid the VAT penalty for late payment being imposed. HMRC have indicated that until 31 December 2023, as a first-year concession, a Penalty will not be issued if all liability owed on the VAT return is paid in full within 30 days of the payment date.
If you are looking for support and assistance in relation to dealing with a potential VAT penalty please get in touch with our specialist team on 01903 2340494. We would be happy to assist you with any issues you might have.