If you file your VAT return late, or if you fail to pay VAT on time, then HMRC will instigate a system of penalties and interest that, for the most part, has been considered as being fairly lenient for some time now.
Although no one advocates for more draconian measures to be brought in against owner-managed businesses, the challenge with the existing approach is that it tends to treat repeat offenders in the same way (broadly) as businesses that miss the occasional deadline.
For many businesses, it is not an issue, as they comply with the various demands of VAT registration in a timely manner.
It does, however, leave those businesses that get things a bit wrong from time to time (but are otherwise compliant), a little aggrieved when they are faced with the same consequences as if they routinely ignored deadlines.
Now, HMRC is changing things.
From 1 January 2023, HMRC is introducing a new system that is intended to be less punitive for those taxpayers who do miss the occasional deadline as opposed to serial offenders.
The new system uses a points-based approach and has separate penalties for late submission of returns and late payment of VAT.
Ultimately, this system will be rolled out across all taxes as part of the move to Making Tax Digital, but HMRC is cutting its teeth on VAT first.
Late VAT Returns
From 1 January 2023, HMRC will award 1 penalty point each time that a VAT return deadline is missed.
This will be separate from penalties for late payment which we look at below.
Each point will last for two years but, similar to penalty points on driving licences, they will expire and be removed from the taxpayer's record provided that the penalty threshold is not reached.
In other words, no penalty is triggered, provided your ‘live’ points are low enough.
The applicable penalty threshold depends on how you file your VAT returns:
Annual VAT returns - 2 points (two late returns)
Quarterly VAT returns - 4 points (4 late returns)
Monthly VAT returns - 5 points (5 late returns)
Once your penalty threshold is reached a fine of £200 is automatically issued. A further £200 fine will then be issued each time a VAT return is late until the taxpayer's penalty points are reset to nil.
In order to reset all penalty points to nil, the offending taxpayer will need to show a history of good, on-time compliance, and bring any outstanding VAT returns up to date.
The compliance period again depends on how VAT returns are made:
Annual VAT returns - 24 months of on-time filing
Quarterly VAT returns - 12 months of on-time filing
Monthly VAT returns - 6 months of on-time filing
So, in short, if you file your VAT returns quarterly and are late filing 4 returns within a two-year period, you will be fined £200 and will need to file on time, every time for 12 months in order to avoid another penalty and to reset your points tally to nil.
Late Payment of VAT
As mentioned above, there will be a separate system of penalties for the late payment of VAT, although payments that are up to 15 days late will not attract any penalty:
Up to 15 days late - no penalty
*16 - 30 days late - 2% of the amount outstanding on day 15
On day 31 - 2% of the amount outstanding on day 15, plus 2% of the amount outstanding on day 30 (so, 4% if nothing has been paid).
From day 31, there will be a daily penalty of 4% (per year) of the total amount outstanding, which will be charged in addition to the penalty calculations on day 15 and day 30 above.
This means that if no payments are made for a full year, the overall penalty charge will equate to 8%.
*Note: We understand that during 2023, HMRC will not apply penalty charges for amounts overdue from day 16 - 30 as part of transitional arrangements.
Penalties Are Not Interest
It is important to understand that the above only relates to the penalties that HMRC will charge for late payment of VAT.
Interest will also be charged from the day that any payment becomes overdue up until the day that it is paid, so the 15-day discretion regarding penalties mentioned above doesn’t apply.
Late payment interest is currently calculated at 2.5% above the Bank of England base rate.
Remember: Interest is payable against late payments even if they are part of a time-to-pay agreement.
Naturally, the easiest way to ensure that your business doesn’t have to pay any penalties concerning VAT is to ensure that you comply with all reporting and payment deadlines. But, what if things go wrong?
The key is to talk to HMRC early and try to come to an agreement with them. Usually, further penalties can be avoided (‘further penalties’ - hence the need to talk to them early) although interest will continue to be charged.
ATN Partnership already works with hundreds of businesses to ensure that their VAT compliance is easy and they can effortlessly avoid falling on the wrong side of HMRC. If you need help, either in staying or getting up to date or would like someone else to speak with HMRC on your behalf, contact us.