Hi

From 1 January 2023, a new penalty and interest regime will be rolled out for late filing and late payment of VAT. 

The new penalties will replace the default surcharge rules for VAT periods starting on or after 1 January 2023, with the first taxpayers to enter the new regime those in stagger group 1 and monthly filers. Any VAT due in respect of periods starting before 1 January 2023 will continue to fall within the default surcharge regime, regardless of when it is paid.

Late submission penalties

For late filing, the new penalty regime will be points based, with each failure to submit a return on time resulting in the taxpayer receiving a penalty point from HMRC. Once the total number of penalty points reaches a certain threshold, a fixed financial penalty of £200 will be charged. 

The penalty points threshold depends on how regularly the return in question is filed:

• Annual returns – 2 points
• Quarterly returns – 4 points
• Monthly returns – 5 points.

So a taxpayer filing quarterly returns would have to file four returns late before they incurred a penalty. 

Individual penalty points do however have a shelf life. Provided that the penalty threshold has not been reached, a point will automatically expire after 24 months.

Once a taxpayer hits the penalty threshold, individual points will no longer automatically expire, and each and every subsequent late filing will trigger a further £200 penalty. At this stage, the only way points can be removed, and further penalties avoided, is through a period of compliance (see below).

The new penalty regime is scheduled to be extended to income tax self assessment (ITSA) in 2024 for those in Making Tax Digital (MTD) and 2025 for those outside MTD. 

However, when it comes to penalty points, VAT and income tax will be treated separately, with separate points awarded and separate penalty thresholds.

For the first time late filing penalties will arise for returns where no VAT is due. This is likely to come as a surprise to repayment traders in particular, who have not previously had to worry about late filing penalties. HMRC is aware of the impact on this sector and is planning direct communications to make relevant businesses aware of the upcoming change.

Once a taxpayer has reached the penalty threshold, the only way their points can be removed is through a period of compliance. When both of the following two conditions are met, the taxpayer’s points will then be reset to zero:

• Each VAT return has been filed on or before its due date for a certain period of time (24 months for annual returns, 12 months for quarterly returns and six months for monthly returns).
• All outstanding VAT returns due in the previous 24 months have been submitted.

For example, a taxpayer who has failed to submit four quarterly returns on time and accumulated four penalty points will receive a £200 penalty. In order for their points to be reset to zero, they will need to get to the point where both:

• Their next four quarterly VAT returns have all been submitted on time; and
• All VAT returns for the previous 24 months have been submitted. 

Late-payment penalties

Under the new regime, there are two separate late-payment penalties – referred to as the first penalty and second penalty. The first penalty has two separate legs:

1. 2% of the VAT unpaid at day 15
2. A further 2% of the VAT unpaid at day 30. 

This means that, if no payment is made until after day 30, the first penalty will be 4% of the amount due. However, if full payment is made between days 15 and 30, the first penalty will be set at 2%.

The second penalty only comes into effect from day 31. This operates rather differently and is charged daily, based on an annual rate of 4% of any outstanding amount. 

The biggest change under the new regime is that, provided all outstanding VAT is paid within 15 days of the due date (or a Time to Pay arrangement is requested within that same period), no late-payment penalty will arise. There will however still be late-payment interest (see below).

One welcome feature of the new late-payment penalty is the acknowledgement of Time to Pay (TTP) arrangements. These are effectively treated in the same way as payment when it comes to stopping the penalty clock. Provided the TTP application is ultimately successful, the date on which it is first requested is treated as the date of payment. For example, if TTP is requested from HMRC on day 14, no penalty will arise regardless of how long it takes for HMRC to approve the TTP arrangement. 

However, if the terms of that TTP agreement are subsequently broken by the taxpayer, the first and second late-payment penalties will be charged as if the TTP had never had effect. This means that missing a single scheduled payment under the TTP could cause full penalties to be charged, even if all previous instalment payments under the agreement have been made on time.

In the first year of the new late-payment penalties there will be a “period of familiarisation”. Under this, HMRC will not charge the first leg of the first penalty (the 2% at day 15) from 1 January 2023 until 31 December 2023. This means that, provided payment is made within 30 days of the due date, no late-payment penalty will arise in the first year the rules are in effect. Ordinary late-payment interest will however be charged as usual.

The way interest is applied to late payments and repayments of VAT is also changing from 1 January 2023, bringing it more in line with other taxes.

From that date, late-payment interest will be charged from the day a VAT payment becomes overdue until the date it is paid in full. The rate applied will be the Bank of England base rate plus 2.5%.

Alongside this, the repayment supplement will be withdrawn for accounting periods beginning on or after 1 January 2023. This will be replaced by repayment interest, which will accrue from the day after the due date or submission date (whichever is later) until HMRC makes the full repayment. This rate for repayment interest will be much lower than that for late-payment interest, being set at the Bank of England base rate minus 1% (subject to a minimum rate of 0.5%). 

The much less generous nature of repayment interest (especially compared with the current repayment supplement) may come as a surprise to those used to receiving VAT back from HMRC. It also raises concerns as to whether, given HMRC’s current service levels, the reduced incentive to make timely repayments will result in taxpayers waiting even longer to receive the amounts they are due. 

We are expecting detailed HMRC manual guidance to be published on the new penalties and interest regime in December 2022. In the meantime, a high-level prepare page has been published on gov.uk.

If you are likely to be impacted by either of these new penalties you should contact your accountant or bookkeeper as soon as possible.

Noel Guilford