HMRC’S NEW PENALTY REGIME FOR VAT FROM 1 JANUARY 2023 – REPLACING THE VAT DEFAULT SURCHARGE SCHEME

The new mechanism introduces separate penalties for the late payment of VAT and the late submission of VAT returns. HMRC’s aim is to penalise ‘only the small minority who persistently miss their obligations rather than those who make occasional mistakes’. However, as always, there will be winners and losers with the new system, so it is important to understand the new rules.

Penalties of 2% of the VAT outstanding will be due if the VAT is unpaid 15 days and 30 days after the due date. After that, a daily penalty at a rate of 4% per year will apply to the outstanding balance until it is paid. Late payment interest will also be charged from day one, in addition to the penalties. These charges can quickly mount up but are arguably better than the previous surcharge regime where businesses can be hit with a surcharge of up to 15% if the VAT is paid late.

Separate penalties will also apply to late submission of VAT returns. These penalties work on a points system with each late return incurring a point. Once a certain number of points have been accrued, (eg 4 points if you file vat Returns quarterly), a penalty of £200 will apply to the next late VAT return. Each subsequent late VAT return will then incur another penalty of £200 unless you have reset your points to zero by keeping up to date with your VAT obligations for a period. For businesses who are in a VAT repayment position or submit £nil VAT returns, these penalties will also apply to you. This is a major change, as previously, those who didn’t owe any VAT didn’t need to worry about surcharges as they only applied if you owed VAT.

There are several practical steps businesses can do to reduce or avoid these penalties.

• Submit returns on time – Even if you cannot pay the VAT by the due date it is still important to submit the return anyway as this way you will avoid the late submission penalty.

• Set up a direct debit – You can set up a direct debit so that HMRC will automatically collect the VAT due from your bank account. This way you can avoid missing the payment due date.

• Make part payments – As the late payment penalties are based on a percentage of the VAT owed, it makes sense to pay even some of the balance off as this will reduce the penalties.

• Time-to-pay agreements – No late payment penalties will be applied once a time-to pay agreement has been accepted by HMRC. However, this does not apply to the late payment interest which will still be charged.

• Reasonable excuse – If a business has a reasonable excuse for submitting or paying the VAT late, it may be possible to appeal against the penalty.

• Grace period – HMRC have introduced a one year grace period for the introduction of the late payment penalties. If all the outstanding VAT is paid within thirty days of the due date, no late payment penalties will be levied in 2023.

The above is a brief outline of the new penalty regime. If you have any questions or concerns about the new regime or your VAT obligations generally, speak to your accountant.

Peter Bevan Bevan & Co, Chartered Accountants peter@bevan.co.uk