The new penalty regime has been deferred to 1 January 2023 to allow taxpayers to migrate efficiently to the new MTD (Making Tax Digital) digital record keeping and HMRC itself to ensure that IT changes respond efficiently to the new requirements dictated by the recent arrangements. New VAT penalties were initially set to be introduced on 1 April 2022, alongside the mandate for all VAT registered businesses to operate MTD for their VAT reporting and submission. These changes will also apply to taxpayers required to file an Income Tax Self-Assessment starting from the tax year 2024/2025. The regime sets out two different treatments for late filing and late payment penalties.
LATE FILING PENALTIES
Businesses will only be subject to a financial penalty for late filing of VAT returns if they reach a threshold of points levied for being late with the submission of VAT returns of previous periods.
A point is received for each late submission – and a penalty charged when the penalty threshold is reached, which depends on the VAT return submission frequency as follows:
- Monthly Submission – 5 points;
- Quarterly Submission – 4 points;
- Annual Submission – 2 points.
i.e., for quarterly filings, taxpayers can submit late up to three returns, the fourth late submission will result in the addition of a penalty point PLUS an automatic £200 financial penalty. After reaching the threshold, no more points will be accumulated, but each late submission will result in an additional £200 financial penalty. HMRC has 2 weeks to notify taxpayers filing their VAT returns monthly for any point levied, 11 weeks for quarterly filings and 48 weeks for annual submissions. Points are set to expire after two years, starting from the month after the one in which the late filing occurred.
If the limit is reached, the points will not expire and taxpayers must meet both of the following conditions to reset them:
- Do not submit late VAT returns for a specific period of compliance i.e., 6 months for monthly submissions, 12 months for quarterly submissions and 24 months for annual submissions.
- Have correctly filed the VAT returns for the previous 24 months, regardless of whether they were submitted late or not.
LATE PAYMENT PENALTIES
The new regime introduces a 15-day initial grace period where no charges for late payment are to be applied if the VAT due corresponds to HMRC within the said 15 days after the submission deadline. Â After the grace period, a first penalty of 2% of the total tax outstanding will be charged. If, after day 30, the tax is still unpaid, the penalty increases to 2% of the tax outstanding at day 15 plus 2% of the tax outstanding at day 30 (totalling 4% of the late paid tax in most cases). Any tax still unpaid on day 31, will trigger an additional penalty accrued daily at a rate of 4% per year on the outstanding tax.
Unlike the penalties for late filing, no history of previous late payment is taken into consideration when charging late payment penalties. Taxpayers will have the opportunity to request Time-to-Pay (TTP) arrangements. This will stop the charges to accrue any further from the date that HMRC is contacted to agree on a payment schedule for the outstanding tax. TTP will not be agreed if requested after day 30 and if at that date there is still tax unpaid, the additional penalty will start accruing as standard from day 31. Any reasonable excuse for a late payment communicated to HMRC before the late penalties are charged will be assessed and, if deemed acceptable, will result in no penalties being raised.
A late payment simple interest at a rate of 2.5% plus the Bank of England base rate will be charged on any tax outstanding after the due date, regardless of any late payment penalty being charged or not.
Maja Tamiazzo
Photo by Kelly Sikkema on Unsplash
