New VAT penalty regime for late payments

January 1st, 2023 heralds not only the start of a new year, but also a new VAT penalty regime. This is a significant change to the current way that taxpayers are penalised for non-compliance with VAT.

Background

Currently, penalties are levied for the late submission of a VAT return or the late payment of a VAT return, with the amount of the penalty being a percentage of the VAT due in that return. The percentage increases on each late event but takes no account of how late the return or payment might be, which has led to challenges as to the proportionality of the regime. These challenges have not been terribly successful, however, they’ve highlighted the inequity of the system as it currently stands.

The new rules

VAT periods commencing on or after 1 January 2023 will be within the new regime, applying to:         

Late filing of returns

Each return that is filed late will earn a point. When points reach a threshold, a fixed penalty of £200 is incurred. Each subsequent late return will also incur a £200 penalty. Points have a lifespan of two years before being wiped.

Points can be cleared entirely if:

• All returns are submitted on time for the subsequent period of compliance; and
• All outstanding returns for the previous 24 months have been submitted.

Late payment of VAT

Penalties for late payment within 15 days of the due date won’t incur a penalty under the new regime (but will incur interest, see below).

For payments made between 16 and 30 days overdue, a penalty of 2% of the VAT owed at day 15 will be due, provided that the payment is made in full or a time to pay agreement is reached before day 30.

Payments made 31 days or more after the due date will incur the 2% penalty above, plus 2% of the VAT owed at day 30, plus another penalty of 4% per year of the amount remaining outstanding, until paid in full or a time to pay agreement is made.

Interest

Interest will be calculated from the due date until the day payment is made in full. The rate to be charged will be Bank of England base rate + 2.5%.

Even if a time to pay agreement is reached with HMRC, interest will still be applied.

Points to note

First, the good news; on 1 January 2023, existing late filing or payment events are wiped, so the new rules start every registration on a clean slate.

For the first year of the new rules, the 2% penalty for late payments made in days 16 – 30 after the due date won’t be applied.

The not so good news; changes in VAT return filing frequency bring adjustments to the points threshold and can be penal. So advice needs to be taken before moving, for example, from quarterly to monthly returns.

A point is still incurred for late filing of a repayment return. This is a marked change from the current rules where there is no penalty for submitting a nil or repayment return late, or for submitting late but paying the VAT due in full.

There are still some issues being worked through with HMRC, including whether the registration’s points record will be shown on the Government Gateway, and we hope that these will be resolved before the end of the year.

Need help?

If you’d like to discuss this in more detail, please get in touch with your usual Larking Gowen contact. You can find contact details in the Our People section of our website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Gillian McGill