VAT penalties from 1 January 2023 – points add up to penalties

For VAT return periods starting from 1 January 2023 onwards, the VAT default surcharge regime has been replaced by a new penalty system with separate penalties for late submission of VAT returns and late payment of VAT. The new system also changes the way in which interest is calculated when taxpayers are late in paying HMRC and vice versa.

Late VAT returns – don’t rack up points

The new penalty points system for late VAT returns, which is intended to be adopted across all taxes in time, is intended to be less punitive where the taxpayer misses the occasional deadline. HMRC will allocate a taxpayer 1 point each time a filing deadline is missed and, like driving licence ‘points’, your points for late returns will expire after specified period has elapsed (see below) unless you go over the penalty thresholds. An important new development is that points can be earned for late nil and repayment returns.

When you reached the relevant number of points, a £200 penalty will be charged. All subsequent missed deadlines will trigger a penalty.

Points for penalties

A penalty will be charged when your total equals these thresholds:

Submission period   Points threshold
Annual   2 points
Quarterly   4 points
Monthly   5 points


VAT returns which do not incur penalties

There are some situations where points will not be accumulated, and these are summarised below:

  • First VAT return if you’re newly VAT registered
  • Final VAT return after you cancel your VAT registration
  • One-off returns that cover a period other than a month, quarter or year.

Resetting the points clock after a penalty

The penalty points that you have accumulated will not automatically expire as normal once you have triggered a penalty. Instead, to reset the clock you have to meet a longer test of good compliance (ie submitting everything on time) for a specified period and submit any outstanding returns due in the prior 24 months. The good compliance period will depend on your return cycle as below.

Submission timeframe   Compliance period
Annual   24 months
Quarterly   12 months
Monthly   6 months

 



 

Late payment of VAT

The new system will apply in two stages, fixed penalties and daily penalties: basically, the later the payment is, the higher the rate of penalty charged.

Payments that are up to 15 days late (ie after the specified payment deadline) will not trigger a penalty regardless of the number of occurrences. There is also a general exclusion where a taxpayer agrees a Time To Pay Agreement with HMRC.

Payments that are between 16 and 30 days late will trigger a penalty of 2%; (of the amount outstanding at day 15) – although, to help businesses transition to the new regime, HMRC will not apply this rule during 2023 unless payments are more than 30 days late.

Payments that are 31 days late or more will trigger a 2% penalty of the amount outstanding at day 15 plus an additional 2% penalty calculated based on the amount outstanding at day 31 (ie a total of 4% if nothing has been paid).

From day 31, there will also be a daily penalty (calculated at 4% per annum) on the amount outstanding, e.g. a VAT liability left unpaid for 13 months will have triggered a total of 8% in tax penalties.

Interest on overdue tax will continue to be charged from the due date at Bank of England base rate plus 2.5% and will continue to accrue even where a time to pay arrangement has been agreed.

Avoiding a penalty

Obviously, filing returns and paying VAT on time is the best way to avoid extra costs. However, if you can’t afford to pay your VAT bill, it is still best to file your return on time (and thus avoid the risk of £200 penalties) and approach HMRC for a Time To Pay Agreement.

Now the new system has come into operation, HMRC have indicated that they intend to allow a ‘period of familiarisation’. This means that businesses will not be charged a first late VAT payment penalty (up to 30 days late) until after 31 December 2023. Rather, businesses will be allowed to take time to get used to the changes due to HMRC’s ‘light touch’ for the first phase of penalties.

As always, a business will have the right to challenge either a late filing point or late payment penalty within 30 days of being notified of the point/penalty by HMRC. This can be done either through a request for HMRC to carry out an internal review of the decision or by an appeal to the First-tier Tax Tribunal. In all cases, the taxpayer will need to prove that they had a ‘reasonable excuse’ for not meeting the relevant deadline – the definition of a reasonable excuse has not changed. There will be an online option for HMRC appeals shortly.

Given the high number of default surcharge disputes that have progressed to Tribunal in recent years, HMRC will be hoping that the new penalty regimes result in fewer taxpayer challenges.

Existing default surcharges

From 1 January 2023, all businesses will begin with a ‘clean slate’ in respect of VAT late filing and payment penalties – there are no transitional arrangements although returns with a starting date before 1 January 2023 will still be covered by the Default Surcharge regime and HMRC will issue and enforce penalties under that regime.

Interest

The new regime covers Default Interest, when a taxpayer is late in paying HMRC as well as Repayment Interest, when HMRC is late paying a taxpayer. The new regime deals with this in a consistent manner and at the same time withdraws completely the historic Repayment Supplement regime for periods starting on 1 January 2023 or later.

The Repayment Supplement regime compensated the taxpayer when HMRC were more than 30 days late (taking into account periods when the ‘clock’ was stopped and started for HMRC queries and taxpayer responses). This was by means of a 5% supplement to the VAT return repayment, but this regime applied solely to VAT returns. It did not apply for example to requests for refunds under the Voluntary Disclosure system, where there have been considerable delays in the last few years at HMRC.

Default (late payment) interest

Late payment interest is charged from the first day that the payment is overdue until the day it’s paid in full. It’s calculated at the Bank of England base rate plus 2.5%, so is as of early January 2023, 6%.

Interest is applied to late VAT returns, amounts due under HMRC assessments, voluntary disclosures where VAT is owed to HMRC, late Payment on Account (POA) instalments and overdue VAT penalties.

Where an amount due is paid in instalments, such as under a Time to Pay arrangement, HMRC also charges interest on the outstanding balance until the tax is paid in full.

Repayment interest

For periods starting on 1 January 2023 or later, If HMRC is late in paying, a taxpayer may be entitled to repayment interest on any VAT owed. This now includes as noted above repayments claimed on voluntary disclosures.

Repayment interest is paid at the Bank of England base rate minus 1%, with a minimum rate of 0.5%, and is currently, in early January 2023, 2.5%. However, HMRC will not pay repayment interest for periods where taxpayers have any outstanding VAT returns.

The start date for the repayment interest depends on whether the VAT being sought has already been paid to HMRC on a VAT return.

  • If the VAT claimed has been paid to HMRC already, then the repayment interest is calculated from latter of the date the VAT was originally paid to HMRC and the deadline for the period in question
  • If the VAT claimed has not been paid to HMRC already, the repayment interest starts on the latter of the deadline for the accounting period in question and the date the VAT return or claim was submitted

As with other taxes, HMRC may set the overpaid VAT against a different tax amount owed to HMRC and repayment interest ends at the date of set off.

Points of contact

If you are facing a VAT penalty or would like to understand these changes in more detail, please get in touch with a member of our VAT team: