Changes to the penalties chargeable for the late filing and payment of VAT returns come in at New Year. These appear to be fairer for the majority of businesses, but could penalise those claiming VAT refunds or submitting nil returns late unlike the current system.

For VAT return periods starting after 1 January 2023, there will be a new penalty regime for the late filing and payment of returns, and also the calculation of interest. This will affect anyone submitting VAT returns.

Currently, late filing will get you into the warning system, though financial penalties are only levied on any unpaid VAT. As the first two levels of surcharge are often waived, these penalties could ramp up immediately to 10% of the unpaid VAT.  The new regime penalises both the late payment and late filing of the return.

Filing penalties

The new regime is based on a point system. If a return is filed after the due date, a point is accumulated and a penalty of £200 is payable when you hit your points threshold. For normal quarterly filing, that threshold is 4 points. Thresholds are 5 and 2 respectively for monthly or annual return periods. If you continue to file late, you continue to pay £200 for each late filing.

For an isolated incident, each point will expire after 24 months, but if you go over your threshold, you need to get all your returns up to date and file on time for 12 months before they can start expiring. So if you keep filing late you will keep paying £200. This will be a particular issue for business who file nil returns or repayment claims. These businesses sometimes delay filing, so that the repayment comes in when they will need the cashflow. Doing that in future can leave them liable to late filing penalties.

Late payment penalties and interest

The current cliff-edge nature of the surcharge regime has given rise to many tribunal cases, where the disproportionate nature of the surcharge has been argued. The new regime will take account of how late a payment is. As with the current regime, any penalty is calculated on the amount of unpaid tax, so a part payment will reduce the amount charged.

A return paid late, but within the first 15 days after the due date will not give rise to a penalty. Amounts unpaid for the 16 to 30 days after the due date will have a penalty charged at 2%, at 30 days there is a penalty of 4%. If you get to 31 days and there is still unpaid tax you pay at 4% per annum, calculated on a daily basis.  Late payments will also accumulate interest at base rate plus 2.5%.

As with the current regime, the penalties and interest are calculated on the amount of tax unpaid, so paying as much as possible as soon as possible, will reduce the charges for late payment. By arranging and sticking to a Time To Pay facility with HMRC, this will avoid late payment penalties altogether, though interest will accrue from the due date at base rate plus 2.5%.

Repayment interest

To date HMRC have been encouraged to deal with repayment claims promptly as they were liable to pay 5% interest if they took more than 30 days to repay. Going forward, delayed repayments will attract interest at 1% below base rate, with a minimum of 0.5%. At current rates, repayment interest will be 2%, instead of the current 5% repayment supplement.

How can I avoid unnecessary costs after the implementation of new VAT penalties?

The new rules are intended to encourage everyone to submit returns in time and to tackle the perceived unfairness in the current system. They also align late payment interest rates with other taxes. HMRC have been trying for many years to stop businesses seeing them as providing free loans, and by levying interest on late payments, these rules go some way to reducing the likelihood that VAT debts will accumulate disproportionately.

The vast majority of businesses will never incur points for late submission or penalties for late payment, but the take away to avoid unnecessary costs should be:

  • file on time even if you can’t pay
  • pay as much as you can as soon as you can and
  • make a time to pay arrangement for any you can’t pay on time

If you would like to discuss the new regulations, please feel free to contact Menzies team of VAT advisers by using the contact form below:

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