January 2023 VATwatch

New Year: New Penalty Regime!

Happy new year. I hope you managed to have some sort of break over the holiday period.

This is a special edition of VATwatch, devoted entirely to the new VAT penalty system which applies to all VAT return periods starting on or after 1 January 2023.

These represent significant changes to the current system and so it is important to have an awareness of how they might impact you and/or your clients.

The aim of the new regime is to get consistency across the different taxes and to make the system fairer so that taxpayers who slip up once or twice are not penalised for it.

The existing default surcharge system will continue to apply to earlier periods, but all taxpayers will start from a clean slate when they enter the new system. In other words, existing late returns will still be subject to the default surcharge but will not count towards your points under the new system.

Late Submissions

The old default surcharge was applied to late payments and late returns. Under the new system, these are split, with late returns being treated differently from late payments.

Points Mean Penalties

Every time you submit a return late, you will receive 1 penalty point.

If you reach the points threshold, you will receive a £200 penalty, and then a further £200 penalty for each subsequent late return.

The thresholds depend on what VAT return frequency you are on:

–       Annual returns      2 points

–       Quarterly returns  4 points

–       Monthly returns    5 points

Removing points

There are two ways in which points can be removed.

The first is that your points will be re-set to zero if you meet two conditions:

Condition A is that you submit all VAT returns on time for a set period (Annual 24 months, quarterly 12 months, and monthly 6 months).

Condition B is that all returns due in the last 24 months are now submitted.

The second is that individual points expire after 24 months if you are not at the point threshold.

It is important to note that the above rules apply to payment returns, repayment returns, and nil returns. This is a significant difference as, previously, a repayment trader could get significantly behind on VAT return filing without incurring penalties which will no longer be possible.

Late Payments

The new system is designed to be fairer and more proportionate than the previous system, in that the sooner you pay the VAT, the lower any penalty will be.

If you pay the VAT (or agree a time to pay arrangement with HMRC) within 15 days of the due date there will be no penalty, although interest will be chargeable (see later).

If you pay 16-30 days late, the penalty will be 2% of the amount outstanding at day 15.

If you pay over 31 days late, the penalty will be made up of:

–       2% of the amount outstanding at day 15, plus

–       2% of the amount outstanding at day 30, plus

–       4% per year until the balance is paid.

There will be a period of familiarisation for 1 year in which penalties will not be charged if payment is made within 30 days.

Late Payment Interest

Late payment will be charged on all late payments at the Bank of England Base Rate + 2.5% from the date payment was due until the date payment is made.

Repayment Interest

If HMRC are late dealing with a repayment VAT Return, interest will be payable to the taxpayer at the Bank of England Base Rate minus 1% (so a bit lower than the rate we have to pay HMRC!!)

HMRC are running a webinar on this topic, and I have a copy of the recording so do let me know if you would like me to forward you a copy.

Useful links:

As you will gather, these are significant changes to the current system so, if you have any questions at all, please get in touch.

Thank you for taking the time to read this VATwatch round-up.