The current default surcharge regime for VAT has often come in for criticism, with the penalties applied being disproportionate to the length of delay. From 1st January 2023, a new VAT penalty regime will replace the outgoing default surcharge system. The penalties under the new system will now be referred to as ‘Late submission penalties.’
The changes come following a series of consultations starting back in 2015 and were eventually introduced in the Finance Act 2021. The main aim from HMRC’s standpoint is to bring consistency to how they treat late filing and payment of VAT returns with the other major taxes. Until now, previous attempts to bring uniformity to the various penalty regimes had excluded any reform to VAT.
The current system – For VAT periods starting before 1 January 2023
The previous system focused on late payments and imposed penalties based on repeated late payments within a 12-month period. Following an initial warning letter on the first offence, these penalties started at 2% and were capped at 15% of the net VAT due to HMRC. Taxpayers’ liability to surcharge would expire when submission and payment of all outstanding returns had been brought up to date and compliance had continued for a period of 12 months from the last instance of non-compliance.
Under the old default surcharge system taxpayers would be liable to a surcharge if you were late a second time for turnovers over £150,000 or a third time for turnovers under £150,000. The taxpayer would then stay in this surcharge period until they were compliant for the next 12 months.
Therefore, for taxpayers with turnover over £150,000, a 5th default where the return was submitted one day late could result in a 15% penalty, a disproportionate charge in any one’s books.
Importantly, the surcharge was based upon the VAT liability due on the return. Under the old system, there was no financial penalty for nil or repayment returns.
The new system – For VAT periods starting on or after 1 January 2023
The new system implements a points-based approach which will now not penalise taxpayers for one-off mistakes but will focus on repeated non-compliance. This is being referred to as a “drivers’ licence” approach.
This system imposes a single penalty point for each instance of non-compliance (late filing of a VAT return) and has different thresholds based on the taxpayer’s return frequency.
- For those submitting Annual returns, the threshold is 2 points
- For those submitting Quarterly returns, the threshold is 4 points
- For those submitting Monthly returns, the threshold is 5 points
Therefore, a taxpayer submitting quarterly VAT returns would not incur a penalty for non-compliance for its first three late returns. The system would only sanction a fourth late return. When compared to the second (or third late return dependent on turnover) bringing a financial sanction, this reform brings welcomed fairness to businesses.
However, it is worth noting that, like the default surcharge period, the new system will still impose a period of compliance. A taxpayer will see their points expire, and revert to zero, differently depending on the frequency of submission.
- Annual returns – 24 months
- Quarterly returns – 12 months
- Monthly returns – 6 months
This means that a taxpayer on quarterly returns, who has filed any outstanding returns and met submission deadlines in a twelve-month period will lose any penalty points accrued.
This provides some consistency with the previous default surcharge regime.
Unlike with the current regime, there are separate penalties for late submission of the return and for late payment of the VAT due.
Late submission penalties
Under the new system, once the taxpayer has exceeded their specific points threshold, HMRC will charge a flat £200 penalty for late submission followed by subsequent £200 penalties per offence. Importantly, the late submission of a nil or repayment return will also result in a penalty.
Late payment penalties
There is a separate sanction for late payment but again, under the new system, this is broken down into separate periods to avoid punishing taxpayers who are marginally late.
The first penalty
- If the VAT amount is paid in full within the first 15 days, then they will not be charged a penalty.
- If the VAT is unpaid after day 15 then a penalty of 2% of the VAT due will be charged.
- If the VAT is unpaid after day 30 then a penalty of 2% of the VAT due will be charged.
The second penalty
- After day 31, if the VAT remains unpaid, taxpayers will receive a ‘second penalty’ which accrues at a daily rate of 4% per year on the outstanding balance until the tax is paid in full.
Time to Pay (TTP)
Where the taxpayer enters into a Time to Pay (TTP) arrangement, provided that it is honoured by the taxpayer, penalties will stop accruing.
Days after due date
Action by taxpayer
||Payment made, or TTP proposed by day 15 and subsequently agreed
||Payment made, or TTP proposed by day 30 and subsequently agreed
||Tax outstanding and no TTP agreed
The additional or second penalty will start to accrue at 4% per year from day 31.
Late payment interest (LPI)
As part of the new penalty regime, HMRC has updating its Late Payment Interest (LPI) rules to bring these in line with other tax regimes. Previously, late interest was only due where VAT was paid late due to an error on a return. Late payment of the VAT due on the return, did not incur interest. This position changes under the new LPI regime.
LPI will be charged on VAT outstanding after the due date, starting from the date the payment was due until is it received by HMRC. LPI is calculated as simple interest at a rate of 2.5% above the Bank of England base rate.
If repayment interest is due from HMRC, it will be paid at the Bank of England base rate less 1%.
Importantly, LPI will continue to apply, even where there is a TTP arrangement in place.
HMRC have conceded a transition period for taxpayers to get used to the changes and have agreed they will not be charging a first late payment penalty for the period 1 January 2023 until 31 December 2023 if the taxpayer pays in full within 30 days of the payment due date.
- Submit your return by the due date, even if you cannot afford to pay the liability as this mitigates the late submission penalties.
- Where you cannot pay the liability by the due date and you need extra time, contact HMRC at the earliest possible opportunity to agree a TTP arrangement. The longer it takes to do this, the higher the late payment penalty will be.
This new approach benefits taxpayers who seek to engage HMRC early. Whilst it appears to address many of the criticisms of the old system, only time will tell if it is a fairer approach.
If you are unsure about anything or would like further information, please contact Andrew McLeod or your usual AAB contact.