According to the Financial Secretary to the Treasury, the new VAT penalty regime has been further delayed. The decision should enable HMRC to implement the required system improvements on a more timely basis. On 1 January 2023, the new system will apply to all UK VAT-registered businesses. It is not the first time the new system has been delayed. Making Tax Digital (MTD) filing was scheduled to be implemented on 1 April 2020 after the completion of the first ‘soft landing’ phase. This delay is not related to the MTD deadline in April 2022.
What are the differences between the current VAT penalty regime and the new one?
The VAT penalty regime will replace the default surcharge with the following amendments:
- Penalties for late payments
- Arrangements for payment on time (Time to Pay Agreement (TTPA))
- Harmonisation of interest rates (intends to bring VAT in line with other tax regimes)
- Penalties based on points for late submission
What does this mean for your business?
In April, companies will file their first Making Tax Digital VAT returns. HMRC will have more time to improve their systems and fix any bugs before the fines take effect in January 2023. Penalties do not apply to VAT reimbursement claims (only late filing). Businesses that are VAT registered might accrue penalties and points if they file late. There is a GBP200 penalty charge when points accumulate and the threshold is reached, and this can quickly add up! Whenever a deadline is missed, a penalty is triggered, but you will lose no points because you must settle the penalty.
After two years, points expire and can be reset to zero. In order for it to happen, the following conditions must be met:
- During this period, all submission responsibilities were met on schedule.
- All VAT returns were submitted within the previous 24 months, regardless of whether they were late.
Example
On 8 August 2022, our ABC Ltd submits their VAT return for quarter-end June 2022 exactly at 00:01 UK time. One point was charged. It has accumulated another penalty point by the end of the year. Quarterly returns for December 2022 and March 2022 are also late. Based on 8 February 2023, ABC Ltd has 4 penalty points, and it will be fined GBP200 if it fails to submit its VAT return by quarter-end June 2023.
A penalty of 2% of the VAT payable on the return will be applied if VAT responsibility is not paid within 15 days of the due date. If payment is not made by day 30, 4% will be assessed, and 4% per year will be added to the tax debt. No matter if you pay the debt within the 15-day deadline, interest will still be charged until it is paid. Businesses who pay up to 15 days late will not be penalised.
How to prepare your business?
New systems will always present challenges, and businesses should seek guidance if penalties have been incorrectly charged. If you have received surcharges, you may be able to appeal both under the current and the new regime. You can file an appeal and ensure compliance with HMRC with the help of our expert VAT team. We have successfully reversed default surcharges!
Further read: gov.uk