Are you aware of the VAT penalty system from 2023?

From 1 January 2023 changes are to be made to the default surcharge system which has been part of the VAT regime for over 30 years. The new system will seek to penalise serial offenders whilst taking a more lenient approach to those who make occasional slips.

There will be two systems, one for late returns and another for late paid tax.

We have detailed what this means and have put together some useful guidance to minimise penalties under the new regime.

Late returns

The late returns system will work on a points accumulation system whereby the business will get 1 point for each late return and then when it hits a threshold will receive a £200 fine. 

The threshold depends on the frequency of submission:

 Monthly returns = 5 points

Quarterly returns = 4 points

Annual returns = 2 points

The points system is a really important change, because it will mean that repayment returns will also be subject to a potential penalty, which is for the first time in 49 years!!

Wiping the slate clean

Once you have accumulated enough points for a penalty, then every late submission will also incur a £200 penalty. However, you can wipe the slate clean if you can fulfil the following conditions:

• 24 previous months of returns must have been submitted
• After reaching the points threshold, all returns submitted on time for 6 months for monthly, 12 months for quarterly and 24 months for annual returns

Late payment

At present, if a business is even one day late in paying its VAT, then it could get a 15% penalty of the unpaid tax on the due date.

Under the new system, there will be no penalty if the tax is paid (or a payment plan agreed) between the first and 15 days after the due date. If the tax is paid between days 16 and 30, then there will be a 2% penalty on the VAT outstanding on day 15.

For tax outstanding on day 30 there will be a 2% penalty on VAT outstanding on day 15 and a further 2% on the amount still owed on day 30.

Payments made or payment plans agreed, after 30 days will be subject to a further penalty based on an annualised rate of 4%.

There will, however, be a first-year concession until 31 December 2023 where a late payment penalty will not be issued if all tax owed is paid by day 30 after the due payment date.

Late payment and repayment interest

Whilst there may be no penalty for late payment during the first 15 days from the due date, interest will accrue from Day one and is calculated at the Bank of England base rate plus 2.5%.

One key change to the system is that at present HMRC pays a 5% supplement where it delays a repayment claim for more than 30 days, and this will be replaced by repayment interest which is calculated as the bank of England base rate minus 1%, subject to a minimum of 0.5%.  Which on current base rates is nowhere near as advantageous to the recipient as the 5% under the current system.

Some useful guidance to minimise penalties under the new regime:

• Set up direct debits with HMRC, as they will automatically collect the VAT three working days after the due date
• Make use of time-to-pay agreements, as no penalty will be applied if it has been accepted by HMRC by the relevant dates
• Submit returns on time even if you cannot pay the tax by the due date
• Make part payments as penalties are calculated on unpaid tax on days 15 & 30

If you would like help with your VAT submissions or have any further questions, please contact our VAT team on 01608 650 450.