New VAT penalties and interest in 2023

• Applies to VAT returns with a start date of 1 January 2023 onwards.  Depending upon your quarterly return stagger, it will commence for period 03/23 or 04/23 or 05/23. If you use monthly returns, it will commence from period 01/23.
• Removes the existing Default Surcharge (DS) and Repayment Supplement.   Overall the changes are an improvement on the existing DS regime, but are more complicated to understand.  Existing DS record will be redundant.
• Late payment penalties but only if payment is not made within 51 days after period end date.   No penalties to be issued for payments due in 2023 as an introductory concession.
• HMRC to pay interest on repayment returns.
• Points based penalties for late submission of returns even if the return is nil or repayment. 
• Late payment interest for the first time, similar to Income Tax Self-Assessment.

Late submission penalties.

Points based.  A penalty point is accrued for every return submitted after the due date (so more than 37 days after period end).  Once the business reaches the points threshold (4 points for quarterly returns, 5 points for monthly returns), a £ 200 fine is issued for this late return, and a further £ 200 penalty for all subsequent late returns.  Points are accrued even if the submitted return is nil or a repayment.  Points are accrued if a return is not submitted also.

How and when the late submission penalty points can be removed?

Two conditions, both need to be met for those businesses at the points threshold. 

• A period of compliance, submission of returns on time (4 quarterly, 6 monthly or 2 annual) AND
• All returns due in the previous 24 months have been submitted to HMRC.

For businesses not at the points threshold (so 3 or less points for quarterly returns), historic points will drop off after 24 months.

Late payment penalties

Two elements, a first late payment penalty and a second late payment penalty.

The first late payment penalty is due when payment is outstanding at Day 15 and Day 30 (after the due date for payment, so 51 days and 67 days after period end). Penalty is 2% of the amount outstanding at Day 15 and Day 30.   No penalties if business formally agrees a Time to Pay (TTP) arrangement with HMRC Debt Management within these timescales.  Essentially the payment window for returns has increased from 37 days to 51 days after period end (a period of grace), before a penalty is activated.  Businesses who wish to take advantage of this longer payment period, should ensure that the return is still submitted on time, to avoid late submission points and late submission penalty.

A second late penalty is due for amounts outstanding more than 30 days after the due date for payment.

Period of familiarisation

No late payment penalties will be issued for returns with a payment date in 2023, but interest still applies.  So for example a business on the March return stagger, will suffer no late payment penalties for periods 03/23, 06/23 and 09/23.  But if period 12/23 is paid late (longer than 51 days after period end), it will incur a late payment penalty.

It is still possible to challenge a late payment penalty, if a taxpayer considers that they have a reasonable excuse.

Late payment interest

In addition to the late payment penalty. Interest rate is the Bank of England base rate plus 2.5% p.a.  Charged daily, if a VAT return full payment is not made within 51 days after period end.  Simple interest, not compound. Even if a TTP arrangement has been made with HMRC, interest is still charged.

Repayment interest

HMRC will pay interest to businesses who submit a repayment return (and are due a repayment) from the date of submission or due date of submission (whichever is later) to the date when HMRC make the repayment.  Rate is the Bank of England base rate minus 1%, with a minimum rate of 0.5% p.a.  Unlike the current Repayment Supplement, interest is still paid even if HMRC undertake an enquiry into the return, and the refund is subsequently released in full.

 

Please contact our VAT Team for further details.