New penalties and interest for late payment and submission of VAT returns
From 1 January 2023, HMRC will replace the default surcharge with a new penalty regime for the late payment of VAT and filing of VAT returns.
The new regime will only be applicable to VAT returns due on or after 1 January 2023. As such, the new change will bring the penalties regime on VAT and, from 2023, on the Income Tax Self-Assessment (ITSA) in line with other taxes.
In addition to bringing VAT in line with other taxes, it is also to encourage businesses to submit their returns and pay their respective VAT liabilities on time and, where there are difficulties in making payments, to contact HMRC sooner to set up a Time To Pay (TTP) arrangement.
According to the new regime, there are three possible types of charges:
- Late submission penalty (LSP)
- Late payment penalty (LPP)
- Late payment interest (LPI)
Where any VAT returns (including nil and repayment returns) will be submitted after the due filing date, HMRC introduce a points-based system. In summary, once a business reaches a penalty threshold, it will issue a £200 LSP for that late VAT return and every subsequent late submission.
The table below shows how the LSP points threshold will vary, based on the frequency of submissions:
|Penalty points threshold
|Period of compliance
For example, a business submitting quarterly returns will receive one point for each late submission in a 24-month period, once they have reached their four point threshold, they will receive an LSP.
The points total will remain in place until a business has both:
- Submitted its returns on time for a period of 12 months (quarterly returns) or six months (monthly returns); and
- Submitted any outstanding returns for the preceding 24 months.
Where a VAT Liability has not been paid in full or a TTP has not been agreed with HMRC, under the new regime, a business will have 15 days after the due payment date to make the payment or 2% LPP will be charged on the outstanding VAT liability.
If no payment is received and no TTP is agreed within 30 days of the due payment date, an additional 2% LPP will be issued.
If no payment or TTP agreement is made from day 31 of the due date of payment, a further penalty, LPP will be levied at a daily rate of 4% per annum.
It is worth noting at this stage that a TTP arrangement, has the same effect of paying the VAT liability; stopping penalties accruing from the day the arrangement is set up, providing the taxpayers continue to honour the terms of their TTP agreement. The table below illustrates how TTPs and LPP work:
|Days after payment due date
|Action by Tax Payer
|Payments made or TTP is proposed by day 15 and then agreed.
|No LLP is payable.
|Payments made or TTP is proposed by day 30 and then agreed.
|If no TTP agreed, LPP will be calculated at 2%.
|Some tax is still unpaid, no TTP agreed.
|A further LPP will be calculated at 2%.
|Tax is still unpaid and no TTP agreed.
|An additional daily penalty will start to accrue at 4% per annum.
*To familiarise taxpayers with the new penalty regime, HMRC will not be levying the first 4% LPP from 1 January 2023 until 31 December 2023, if the VAT payment is made in full within 30 days of the payment due date.
Finally, under the new regime, late payment interest will accrue from the first day after the due payment date and will be calculated at the Bank of England base rate plus 2.5% and will continue to be charged on any amount outstanding, regardless of any TTP in place.
If a VAT repayment is due, interest will also be paid by HMRC to a business at the rate of the Bank of England base rate, less 1% (with a minimum of 0.5%)
Having assessed the new penalty regime for VAT, in some ways, it does not compare favourably with the default surcharge regime whereby a business could, potentially, submit two late returns in a rolling 12 months without incurring any surcharge. However, the advantage of the new penalty regime shines in instances where a business repeatedly submits late returns, where previously it would be facing a maximum surcharge of 15%.
Finally, with the new penalty regime, VAT registered businesses will have a clear incentive to pay their VAT bills as soon as possible.
More detailed guidance about the changes to VAT will be published in our VAT newsletter together with a few worked examples. If you would like to subscribe to our newsletter, contact our team here.
In the meantime, should you require any assistance with your VAT affairs, please reach out to our expert team.