UHY Ross Brooke Chartered Accountants

VAT registered business? Are you ready for the new VAT penalty regime from 1 January?

vat - need to know

VAT registered organisations are no doubt aware of the current default surcharge mechanism for late filing or payment of VAT (but not too familiar we hope!).

By Chris Davies

The current system is arguably poorly targeted and can give some seemingly unfair results including one case where a penalty of £297,000 was levied for being just one day late!

If you are VAT registered you ought to be aware that the Government are revising the penalty and interest rules taking effect for the first VAT period beginning on or after 1 January 2023. These rules will ultimately be aligned with those for income tax and corporation tax.

There are three legs to the new penalty regime:

  • Penalties for late submission of VAT returns
  • Penalties for late payment of VAT
  • Interest on late payment of VAT

We will look at each of these in turn

Late submission penalties

Taxpayers will receive a point every time they miss a submission deadline. HMRC will notify them of each point. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The threshold is determined by how often a taxpayer is required to make their submission.

When a taxpayer has reached the relevant threshold, as determined by their submission frequency, a penalty will be charged for that failure and every subsequent failure to make a submission on time, but their points total will not increase.

The penalty thresholds will be as follows:

Submission frequency thresholdPenalty
Annual2 points
Quarterly4 points
Monthly5 points

After a taxpayer has reached the penalty threshold, all the points accrued within that points total will be reset to zero when the taxpayer has met both the following conditions:

  1. A period of compliance (that is, meeting all submission obligations on time for the period of compliance – see period of compliance table).
  2. The taxpayer has submitted all the submissions which were due within the preceding 24 months. It does not matter whether or not these submissions were initially late.

Both requirements must be met before points can be reset.

The periods of compliance are:

Submission frequencyPeriod of compliance
Annual24 months
Quarterly12 months
Monthly6 months

HMRC has discretionary power not to levy a point or charge a penalty in relation to an individual taxpayer or group of taxpayers if they consider it appropriate to do so in the particular circumstances, for example if the taxpayer has a reasonable excuse such as unforeseen circumstances beyond the taxpayer’s control.

Late payment penalties

Up to 15 days overdue

There will be no penalty if the VAT owed is paid in full or a late payment plan agreed on or between days 1 and 15.

Between 16 and 30 days overdue

There will be a first penalty calculated at 2% on the VAT owed at day 15 if the VAT is paid in full or a payment plan agreed on or between days 16 and 30.

31 days or more overdue

There will be a first penalty calculated at 2% on the VAT owed at day 15 plus 2% on the VAT owed at day 30.

There will be a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full or a payment plan is agreed.

Period of familiarisation

To give taxpayers time to get used to the changes, HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the VAT is paid in full within 30 days of your payment due date.

How late payment interest will be charged

From 1 January 2023, HMRC will charge late payment interest from the day the payment is overdue to the day that payment is made in full.

Late payment interest is calculated as the Bank of England base rate plus 2.5%.

Introduction of repayment interest

Finally, a further change is that the repayment supplement will be withdrawn from 1 January 2023.

For accounting periods starting on or after 1 January 2023, HMRC will pay repayment interest on any VAT that the taxpayer is owed, from the day after the due date or the date of submission (whichever is later) and until the day HMRC pays the repayment VAT amount in full.

Repayment interest will be calculated as the Bank of England base rate minus 1%. The minimum rate of repayment interest will always be 0.5% even if the repayment interest calculation results in a lower percentage.

Conclusion

The new penalties do appear to be more targeted but also seem to be more complicated to understand and calculate. If you have any questions regarding VAT and the new penalty regime do please get in touch with your local UHY Ross Brooke office in Abingdon, Hungerford, Newbury or Swindon.

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