In the new year we will be saying goodbye to the longstanding, if not much-loved, default surcharge regime. Instead, for VAT periods starting on or after January 1 2023, new penalties will apply if you are late filing a VAT return or paying your VAT bill. The way interest applies to late VAT payments, and late repayments by HMRC, will also change.
These new rules have some features which are a distinct improvement on the old default surcharge regime. However, other aspects could catch out taxpayers and their agents.
The new late filing penalties will be points based, with taxpayers receiving a point for each VAT return they file late. Once the taxpayer’s total number of points reaches a certain threshold, a fixed £200 penalty will be charged. This threshold depends on how often the taxpayer files their VAT returns – four points for quarterly, five points for monthly and two points for annually.
Once a taxpayer reaches their penalty threshold, each and every additional late VAT return will trigger a further £200 penalty. However, it is possible for points to expire:
- If the taxpayer is below their penalty threshold, points will automatically expire after 24 months.
- If the taxpayer has reached their penalty threshold, points will only expire after a ‘period of compliance’.
The period of compliance broadly requires all returns for a certain period of time (e.g. 12 months for quarterly VAT returns) to be filed on time, and all outstanding VAT returns for the past 24 months to have been submitted. Once both of these conditions are met, the good news is that the taxpayer’s points total will be reset to zero.
Importantly, unlike default surcharge, under the new regime there is no connection between the amount of any late filing penalty and the VAT due on the return. As a result, repayment traders and taxpayers filing nil returns will be in the scope of late filing penalties for the very first time.
The new late payment penalties are designed to encourage taxpayers who are struggling to pay to engage with HMRC as soon as possible.
There will be two separate penalties, based on how late payment is:
- A first penalty of 2% of the VAT unpaid at day 15, and a further 2% of the VAT unpaid at day 30.
- A second penalty starting at day 31, charged daily based on an annual rate of 4% of the outstanding amount.
For the purposes of both penalties, agreeing a Time to Pay (TTP) arrangement with HMRC is effectively treated in the same way as payment, with the penalty clock being ‘stopped’ on the date of the original TTP application. However, if the terms of that TTP are subsequently broken, it will be treated as if it never existed and full penalties will be charged.
Under the new rules, paying or requesting a TTP within 15 days of the due date means no penalty arises. In addition, in the first year the rules are in place there will be a ‘period of familiarisation’, with HMRC not charging the first leg of the first penalty (i.e. the 2% at day 15) from January 1 until December 31, 2023. As a result, in that period, taxpayers will be able to pay their VAT bills up to 30 days late without incurring a penalty (though interest will still be charged).
It’s not just penalties that are changing this January, but interest too.