Say hello to HMRC’s new VAT penalty & interest rules

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 1^st 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 5^th 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.

Penalty values

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	Penalty
0-15	Payment made, or TTP proposed by day 15 and subsequently agreed	No penalty
16-30	Payment made, or TTP proposed by day 30 and subsequently agreed	2%
Day 30	Tax outstanding and no TTP agreed	4%

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.

Honeymoon Period

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.

AAB’s recommendations

• 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.

VAT treatments to help manage your cashflow

Businesses are continuing to face uncertainty arising from tensions created by the global political and economic situation and the impact of the pandemic. These issues have the potential to impact significantly on your cashflow. For many businesses, VAT can have one of the biggest impacts on cashflow and we have set out several ways in which differing VAT treatments can help manage your cashflow.  

FREQUENCY OF VAT RETURNS

The default position for VAT returns is submission on a quarterly basis. However, if you are in a repayment position on a regular basis, i.e. you are claiming VAT back from HMRC on your VAT returns, then we would recommend moving from quarterly returns to monthly returns. This will speed up the repayment of VAT owed to the business.  

If you are not already on monthly VAT returns, it is straightforward to change this using your VAT online services account. 

TAX POINTS

The tax point determines the time at which VAT becomes accountable to HMRC. The basic tax point for goods is when they are removed or otherwise made available. For services the tax point is when the services are performed.  

This basic tax point can be advanced by the receipt of a payment or issue of an invoice before the basic tax point. The issue of an invoice within 14 days after the basic tax point also creates an actual tax point. Consequently, for most supplies of goods and services the scope to delay the tax point is limited. 

However, for the continuous supply of services, there is no basic tax point. And a tax point is only created by the issue of an invoice or the receipt of payment. Rather than issue an invoice to customers, the issue of either a pro-forma document or a request for payment, neither of which create a tax point, can delay the tax point until payment has been received. 

Importantly, a pro-forma document or request for payment is not evidence of your right to claim input tax. If you have received one of these documents, you must wait until you receive a full VAT invoice or a VAT receipt before claiming the input VAT. 

VAT ACCOUNTING SCHEMES

The standard method of accounting for VAT is ‘accruals’ based, meaning when you raise an invoice there is a liability to account for the VAT, regardless of whether payment has been made under the terms of the invoice.  

For businesses with a taxable turnover below £1.35m, there are VAT accounting schemes which may assist in managing your cashflow.  

Most beneficial is the cash accounting scheme. Under this scheme, VAT is only accounted for on receipt of payment from your customers. The flipside is that you can only recover input tax when you have paid your suppliers. As a result, cash accounting would not be beneficial for repayment businesses. You should model the position for your business to understand whether there would be an advantage.  

In addition, the annual accounting scheme may also be useful. Under this scheme, there is only one annual VAT return required. However, payments are required throughout the year based on your previous years VAT liability. A cashflow advantage is mainly gained where the VAT liability for your business is growing year on year.

BAD DEBT RELIEF

Where your customers are late in paying for your goods and services, where you are not operating under the cash accounting scheme, this has an obvious impact on your cash flow as you will already have declared and paid the VAT due on your returns. Bad debt relief (BDR) can help you offset some of this cash flow impact. 

Where a debt, on which VAT has been paid to HMRC, has been outstanding for six months, the VAT paid over to HMRC can be recovered. There are certain criteria to be met, most important being that the VAT must be unpaid at least six months after payment was due. Critically, this may not be the same as when the invoice was issued; if you allow extended payment terms (e.g. 30 days from date of issue), it is six months after the payment terms expire when BDR becomes available.  

It is worth reviewing your aged debtors list as a quick way of establishing whether you claim BDR relief. However, as with most VAT regulations, it is a double-edged sword –  if you have aged creditors greater than six months old, then you must repay any input tax already claimed to HMRC.

POSTPONED IMPORT VAT ACCOUNTING (PVA)

To avoid the significant cash flow issue that would have been created by Brexit, postponed import VAT accounting (PVA) was introduced on 1 January 2021. PVA allows payment of import VAT to be deferred to the next VAT return. Importantly, this extends not only to imports from the EU but also to imports for third countries; offering a significant new cash flow benefit to those importers. 

Using PVA is straight-forward; there is no application process or security requirements. You simply instruct your customs agent to use PVA and provide your VAT and EORI number. Statements setting out the amounts due under PVA are available from the Customs Declaration Service (CDS). Where the import VAT is recoverable, the VAT can be reclaimed on the same VAT return on which it is declared. 

In all cases, care is needed when managing cashflow using VAT rules as there are anti-avoidance regulations which can apply. If you are unsure about anything or would like further information, please get in touch with your usual AAB contact.

The reality of Brexit

Even with COVID19 overshadowing everything during 2020, Brexit did not exactly creep up on exporters on 1 January 2021.  However, with the EU-UK Trade and Cooperation Agreement only being finalised on Christmas Eve, UK businesses had very little time to prepare for the reality of Brexit.  It is little wonder, therefore, that we have had all of the headlines in the first few months of 2021 around delays at the ports, rotting food on lorries and empty shelves in stores.  Even the UK’s beloved “Percy Pig” was threatened by EU “red tape”!

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Further Extension to VAT Rate Cut for Tourism & Hospitality Industries

Following Rishi Sunak’s budget announcement earlier today the temporary reduced rate of 5% VAT for the Tourism and Hospitality Sectors has been extended for a further 6 months until 30th September 2021.  Furthermore, an interim rate of 12.5% will be introduced for the sector from 1st October 2021 until 31st March 2022. Thereafter the standard rate of VAT will apply again.

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Did you defer your VAT due to COVID?

*Updated 23 February 2021*

The VAT Deferred payment scheme is now open and can be applied for using the following link: https://www.gov.uk/guidance/deferral-of-vat-payments-due-to-coronavirus-covid-19

If you have any queries regarding the scheme, please contact your usual AAB contact.

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Construction Reverse Charge upcoming changes – Q&A

Important VAT changes are coming to the construction and property sector from 1 March 2021. The Construction Reverse Charge is being introduced, changing who is responsible for accounting for VAT in relation to certain supplies.

But what does this mean? AAB’s Alistair Duncan, Indirect Tax specialist at AAB, hosted a Q&A on LinkedIn answering the most important questions surrounding the change. We’ve summarised the questions and answers below.

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2020 Year in Review – Construction & Property Sector

2020 will undoubtedly be remembered as the year of ‘unprecedented’ challenges and change, for individuals and businesses across all sectors, particularly in Q1 and the start of Q2.

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Don’t be blind to the Brexit challenges

Even with perfect vision, no-one could have foreseen how difficult a year 2020 would have been for UK businesses.  However, as we head towards 2021, and the end of the Brexit transitional period, the fresh challenges involved in the import or export of goods and services from the UK are clearer to see. 

If we look at some of the challenges resulting from the changed relationship with the EU, we can consider what steps businesses should be taking now to prepare for 1 January 2021. 

Movement of goods

For the first time since 1993, any goods moved between the UK and EU will require presentation of the relevant customs declarations.   For any declarations lodged with the UK authorities, a UK Economic Operators Registration and Identification (EORI) number will be needed.  Importantly, if UK businesses will also be responsible for import or export declarations in the EU, a separate EU EORI number will be required. UK businesses should ensure that they have the appropriate EORI number in place in advance of 1 January. 

The end of the transitional period has an impact on the Tariff rates that apply not only to imports from EU countries but, as the UK will no longer be covered by the EU Tariff, also to imports from the rest of the world.  The new UK Global Tariff will be set on a non-preferential basis using the ‘most favoured nation’ tariff schedule of the World Trade Organisation (WTO).  

Businesses should ensure that they understand any changes to the duty rates that will apply to their non-UK sourced goods from 1 January 2021.  Considerations may need to be given to whether it remains economically viable to source goods from EU countries or whether there is a need for businesses to review their supply chain. 

The commercial terms agreed for cross border transactions will become particularly important.  These commercial terms, called Incoterms, determine whether it is the seller or customer who is responsible for the customs declarations and any import duties.  Trading with the wrong incoterms can lead to delays in processing the customs documentation and potentially unexpected VAT or duty costs which can make a significant impact on the profitability of these contracts. 

No changes to VAT?

The UK Government has indicated that there will be minimal changes to the VAT rules after Brexit.  However, UK businesses should not think that this means that they will be unaffected next year.  One of the main, positive changes for UK businesses will be the introduction of a postponed import VAT regime which will avoid the cashflow cost of import VAT.   

However, UK companies may have a requirement to register for VAT in an EU member state to maintain the benefits of some EU VAT simplifications such as, distance sales, call-off stock and triangulation.   

In addition, as a non-EU company, UK businesses may need to appoint a VAT fiscal representative in other EU jurisdictions.  Currently 2/3rds of EU countries require the appointment of a VAT representative, with all of the associated costs that this brings. 

E-Commerce

One sector that will be particularly impacted by these Brexit changes will be the e-commerce industry.  Amazon has announced that UK Fulfilment by Amazon (FBA) operations will be split from their EU operations.  1 January 2021 will see an end to FBA inventory transfers between the UK and EU.   As a result, without EU stocks, UK Amazon sellers will see their market shrink from 446 million potential EU customers to only 67 million Brits. 

Consequently, in order to maintain a pan-European business model, UK e-commerce businesses may be forced to set up an EU based stock facility with all of the issues with registration, VAT fiscal representation and EORI numbers that that entails. 

Rather than move blindly into a post-Brexit world, UK businesses need to use the last few days of 2020 to take steps to avoid potential issues, taking professional advice where necessary.   

For more information on how we can help you prepare your business for Brexit, please get in touch with Alistair Duncan, Head of Indirect Taxes.

Postponed import VAT accounting – A Brexit plus point

*Updated 4 March 2021*

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Don’t get caught in the post-Brexit customs net

Scotland’s Food and Drink sector is vitally important to the Scottish Economy. Consistently Food and Drink is Scotland’s top export sector, latest HM Revenue and Customs statistics shows that, for 2018, food and drink exports totalled £6.3bn. Of this, £2.3bn were to the EU. 

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