Following a period of consultation, HMRC are introducing a new penalty system for late submission of returns and payment of VAT. This system will replace the current default surcharge regime. The new penalties will apply to VAT returns starting on or after 1 January 2023. The new system is intended to simplify the current system and to encourage compliance with deadlines. The aim is only to penalise repeat offenders. It will also apply to Income tax and Self Assessment.
The new system is in three parts – (1) late submission, (2) late payment of VAT and late payment interest (“LPI”) :
Late submission of return
- There will be a points system for late submission of returns. Each late return will incur points and when the points threshold is breached, a fixed penalty of £200 will be charged. The points threshold depends on the return periods i.e. monthly (5 points), quarterly (4 points) and annually (2 points)
- Points will be reset to zero after certain conditions are met
- Further fixed penalties will apply to each late submission where a business continues to miss deadlines after the first penalty is issued. This will be the case even where the first penalty has been paid
Late payment of VAT
- Payments made within 0-15 days of the return due date will not incur a penalty
- Payments made after 15 days will incur a first penalty of 2% of the outstanding VAT
- If the VAT remains unpaid after 30 days, a further penalty will be incurred. This will be 2% of the outstanding VAT at day 15 plus 2% of the outstanding VAT at day 30 (so 4% in most cases)
- If the tax remains outstanding at day 31, a second or additional penalty will apply. This accrues at a daily rate of 4% until the outstanding VAT is paid in full.
- A time to pay arrangement agreed with HMRC can stop the penalties accruing further.
It has been announced that HMRC will apply a “light touch” approach to the first penalty in the first year where businesses are seen to be trying to comply. During the first year, they will allow businesses 30 days to pay before applying the first penalty. If there has been no contact after 30 days, a penalty will be charged. Penalties will not be charged or may be reduced where a business has a reasonable excuse for non payment or where special circumstances apply.
Late payment interest
LPI will apply to outstanding VAT (including payments on account, assessments) regardless of whether a penalty is charged. LPI will apply from the date the VAT was due until the date it is paid to HMRC. The rate of interest will be 2.5% above the Bank of England base rate. LPI will continue to apply even where a time to pay arrangement has been agreed for the outstanding VAT.