New VAT penalty regime
The new penalties will apply to VAT accounting periods beginning on or after 1 January 2023. This is a deferral by the government who had announced in the latest Autumn Statement a start date of 1 April 2022.
The Finance Act 2021 sets out astonishingly complex legislation. In summary, for a VAT return not submitted and a VAT liability not paid, the taxpayer risks the following penalties:
- £200 maximum fixed penalty
This penalty is for failure to submit a VAT return.
No penalty applies unless a certain threshold of prior non-compliance is reached.
The measure of prior compliance is a complex points system. Taxpayers will receive a point every time they miss a submission deadline and the points threshold varies depending upon the submission frequency. Most taxpayers submit VAT returns quarterly, which has a 4 point threshold (ie 4 VAT returns not submitted on time).
The points expire after two years, unless the threshold has been exceeded in which case all points remain in place until a consistent period of compliance has been achieved (eg for quarterly VAT returns this is 12 months) and all outstanding VAT returns have been submitted.
Up to 4%
This penalty is for late payment.
No penalty applies if payment is up to 15 days late.
A 2% penalty applies if payment is 16-30 days late.
A 4% penalty applies if payment is more than 30 days late.
The percentage is applied to the amount of VAT liability which is has not yet been paid to HMRC.
In fact the system is even more intricate than the above. If a VAT liability is partially paid 16-30 days late, 2% applies to the higher amount outstanding after day 15 and an additional 2% applies to the lower amount outstanding after day 30.
This is an additional penalty for late payment.
If payment is made more than 30 days late, in additional to raising the penalty from 2% to 4%, there will also be a daily rate penalty. This daily penalty will be calculated to give an effective annual rate of 4%.
If a delay cannot be avoided, communicate with HMRC as soon as possible.
Communicate 1: HMRC have discretion not to impose points/penalties, but only up until the points/penalties are imposed.
Communicate 2: for delayed payments, it is possible to agree "Time to Pay" arrangements with HMRC.
Points and penalties can also be formally appealed on the grounds of a reasonable excuse.
The new VAT penalty regime separates penalties for late submission from penalties for late payment. This makes the system more sensitive and fairer. It should also encourage (i) submission of the VAT return on time even if payment is delayed and (ii) payment of the VAT liability on time even if submission is delayed. It should also encourage payment as soon as possible even when delayed, where currently there is little motivation once already late.
The new penalties for late submission are a fixed sum and do not apply where submissions were largely timely despite occasional lapses. This is much more generous than the previous VAT penalty regime where one failure either to pay or to submit a return on time entered the taxpayer into a default surcharge period. For example, a taxpayer with quarterly returns can now make three late VAT return submissions in two years and still not be penalised.
The new penalties for late payment are geared. No penalty for the first 15 days late effectively defers the due date for payment, but after that the later the payment, the more the penalty: 2%, then an additional 2%, then a daily rate until the VAT liability is paid. This should encourage taxpayers to pay as much as they can, as early as they can.
The new, sensitive regime will be fairer on businesses who might have a single busy (eg seasonal) quarter making it both a larger VAT bill and more difficult to complete and pay VAT returns on time. Under the previous penalty regime, these businesses would incur a disproportionately large penalty (default surcharge) for being even one day late with either payment or submission.
HMRC have said they will apply a light touch in the first year, but it remains to be seen what this means in practice.
For further information, please get in touch with our VAT team who would be delighted to discuss any queries.