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New late payment regime for VAT – Points make penalties

New VAT system will be fairer but more complex

HMRC’s new penalty regime for late filing and late payments of VAT will be fairer but more complex with interest being charged on all late payments.

Alan Pearce, VAT partner at Blick Rothenberg said: “HMRC is introducing a new penalty regime for late filing and late payments of VAT for returns commencing on or after 1 January 2023. Which all businesses that are registered for VAT need to be aware of.

He added: The new regime will be fairer to businesses by penalising those that persistently file and pay late, rather than those that make the odd slip up. It will replace the current default surcharge regime that has been widely criticised for levying significant penalties where payment is only one day late. However, unlike the current regime, there will be a more complex multi-tier penalties system with interest also being charged on all late payments.”

Alan said: “ The new regime will effectively have four different types of charges; a fixed penalty amount for late filings based on a points system (a similar concept to totting up points for driving offences); an initial two-part fixed rate penalty for late payments of 2% and 4% (applying to the first 15 and 30 days); an ongoing 4% daily interest-based penalty (applying after 30 days) and interest charged at 2.5% above the Bank of England base rate (applying from the outset).

He added: “The new penalty regime is more complicated than the current default surcharge regime. However, it appears to be fairer to those businesses that might occasionally pay late and rewards those that do their best to pay outstanding tax as early as possible. Under the current rules businesses are often hit with large surcharges of between 2% and 15% for simply being one day late. This can often be caused by a one-off administration error or banking delay. The change should therefore be welcomed and should avoid the need for many default surcharge appeals where the amount of the penalty is disproportionate to the amount and timing of the late payment. Alan said: “For many defaulters, the new rules will result in a relatively small penalty and interest having to be paid. However, for businesses that persistently fail to submit their VAT returns on time and are frequently more than 30 days late in paying, they will suffer the highest level of penalties and interest. It seems that HMRC have struck a balance of penalising serial offenders more heavily while incentivising compliance and being more lenient on those that make the occasional slip up.”

He added: “Furthermore, HMRC has announced it will apply a “light touch” for the first year of operation. Specifically, where a business is doing its best to comply, HMRC will waive the first 2% fixed penalty for VAT periods up to the end of 2023. This effectively means that provided payments is received within 30 days of the due date (or, during this period, an approach to HMRC has been made for a time to pay application) penalties can be avoided. However, even where agreement is reached with HMRC, interest will still apply.”

The new regime can be summarised as follows:

Fixed rate, points based, late submission penalties – HMRC will apply a single penalty point for each late submission of a VAT return. When a business has exceeded the points threshold, a fixed rate penalty of £200 will be issued for each subsequent late return. For businesses on standard quarterly returns the threshold is 4 points in any two-year period. For those on monthly returns, it’s 5 points and those submitting annual VAT returns, just 2 points. Points will accrue where the return is a repayment or nil return, if filed late. Points are reset to zero when all returns have been filed and there has been a continuous period of good compliance (12 month for quarterly filings, 6 months for monthly filings and 24 months for annual filings).

Fixed rate percentage penalties for late payments – this is a two-part penalty charge. The first charge will be imposed at 2% of the outstanding tax, provided payment is made between 16 and 30 days after the due date. A second charge is imposed at 4% if any tax remains unpaid 30 days after the due date. Therefore, no penalty will be charged if payment is received by HMRC on or before the 15th day following the due date.

Daily interest rate-based penalties set at 4% per annum – this will apply from the 31 days after the due date for payment and will run until the business pays the tax due. This will be charged in addition to the two-part 2% and 4% fixed rate penalty amounts above.

Late payment interest – this is calculated at 2.5% above the Bank of England rate and will be payable on all tax outstanding from the day after the due date of payment. This will run concurrently.

Would you like to know more?

If you would like to discuss any of the above in more detail, please contact Alan using the form below, or through your usual Blick Rothenberg contact.

Contact Alan

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