Vat Penalties and Interest Charges – 1st January 2023

HMRC has introduced 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. It will replace the ongoing VAT default surcharge regime which was more lenient 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. The new penalty system from January 2023 will adopt a penalty point approach for both late submission and late payment in an attempt to apply a level of penalty that is proportionate to the extent of the non-compliance with the VAT legislation and will change the way in which interest is calculated when taxpayers are late in paying HMRC and vice versa.

Late VAT submissions

The new penalty points system for late VAT returns is intended to be less punitive where the taxpayer misses the occasional deadline. For VAT accounting periods starting on or after 1 January 2023, late submission penalties apply if you submit your VAT Return late. This includes nil or repayment returns. HMRC will allocate a taxpayer 1 point each time a filing deadline is missed and, your points for late returns will expire after specified period has elapsed unless you go over the penalty thresholds. (see below)

When you reached the relevant number of points, a £200 penalty will be charged, a further £200 penalty will be received for each subsequent late submission while you’re at the threshold.

Points for penalties

A penalty will be charged when your total points equals the following thresholds:

VAT Submission period

Points threshold

Annual

2 points

Quarterly

4 points

Monthly

5 points

Penalty example for a business making quarterly returns

A company files their VAT return once every quarter, which makes their maximum penalty points threshold of 4 points. They have already incurred 3 penalty points as they were late in submitting their last three returns. Their most recent return was also submitted late, which caused them to reach the maximum penalty point threshold and incur a fine of £200. If the company manages to submit their upcoming return on time, they will remain at the 4-point threshold and avoid the £200 penalty. However, if they are late in submitting their next return while still at the 4-point threshold, they will incur another £200 penalty. 

VAT Returns not receiving penalty points

The late submission penalty rules do not apply to following submissions:

·         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

Although, it will be possible for a VAT registered business to reset its penalty point tally if they have reached the threshold 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 next 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.

If the taxpayer is below their penalty threshold, points will automatically expire after 24 months.

Late payment penalty and interest

For VAT return periods starting on or after 1 January 2023, late VAT payments will attract both interest and penalties. Late payment penalties will apply to any payments of VAT not paid in full by the relevant due date. There is a general exclusion where a taxpayer agrees a Time To Pay Agreement (TTP) with HMRC or request a TTP arrangement within 15 days of the due date.

No late payment penalty will be charged where the VAT is paid within 14 days of the due date.

Payments that are between 16 and 30 days late will be charged a penalty of 2% of the amount outstanding at day 15. Payments that are 31 days late or more will be charged a 2% penalty of the amount outstanding at day 15 plus an additional 2% penalty calculated based on the amount outstanding at day 31 (a total of 4% if nothing has been paid).

From day 31, there will also be a daily penalty (until the amount is paid in full); 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.

HMRC will charge interest on the overdue tax payment from the day it is due up to the date of payment made in full at a rate of interest of Bank of England base rate plus 2.5%, even where the business has a TTP arrangement in place (until the amount is paid in full). 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.

Avoiding penalty and Period of familiarization

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.

Although, in the first year the rules are in place there will be a ‘period of familiarisation’, where HMRC not charging the first late payment penalty (i.e. the 2% at day 15) from January 1 until December 31, 2023. As a result, in that period, taxpayers will be able to pay their VAT bills up to 30 days late without incurring a penalty (though interest will still be charged).

Repayment interest

HMRC will usually repay the difference of VAT amount or if amount overpaid by making a VAT repayment. 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 also includes 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%.  However, HMRC will not pay repayment interest for periods where taxpayers have any outstanding VAT returns.

Repayment interest is calculated from the day after the later of the two dates if VAT amount is paid:

·         When you paid the VAT to HMRC;

·         The payment deadline for your accounting period.

Repayment interest starts from the day after the later of the two dates if VAT amount is unpaid:

·         The payment deadline for your accounting period;

·         When you submitted the VAT return or claim.

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.

A business will have the right to appeal against 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 review request for HMRC to carry out an internal review of the decision or by an appeal to the Tax Tribunal. In all cases, the taxpayer will need to prove that they had a ‘reasonable excuse’ for not meeting the relevant deadline.

Looking to build a clear roadmap to successfully achieve your tax compliance journey? Want your business to have a long-term vision and ability to meet external regulatory changes beforehand through a proactive rather than reactive approach? Then contact Cheylesmore Chartered Accountants today either via a free 15-minute discovery call or booking a 60-minute meeting with one of our partners. We will analyse your business and tailor a package that meets your company's requirements because no 2 clients are the same. We grow as you grow with your success being our success, so you know we’re going to pull out all the stops to give you the best experience possible.