WellTax Blog

The new VAT Penalty Points System

May 1, 2023

HMRC launched a new penalty system for businesses. If they fail to submit their VAT Return, late submission penalties will apply by the 1 January 2023 deadline.

New penalties will replace the VAT default surcharge for late submissions and late payments. These changes will affect all VAT returns, including nil or repayment returns.

A points-based system is used to assess late submission penalties. Each late return will result in a penalty point.

In general, VAT returns filed annually are subject to a penalty threshold of two points, quarterly VAT returns are subject to a penalty threshold of four points, and monthly VAT returns are subject to a penalty threshold of five points. Penalty points will be eliminated for a set period after having submitted the VAT returns on time. It varies depending on how frequently they file a return. For example, for annual reporting, a period of 24 months is required, for quarterly reporting, a period of 12 months is required. For monthly reporting, a period of six months is required.

Companies will be charged £200 if businesses reach the penalty points threshold, plus another £200 if they fail to submit on time.

Fixed penalties and daily penalties are part of this points system. There is no penalty for late payments up to 15 days past due, but a 2% penalty (of the outstanding balance) applies after 16 to 30 days. The revised system may take some time to adapt to for some businesses. However, these rules won’t apply until payments are past due for more than 30 days in 2023.

A 2% penalty will be assessed on late payments received more than 30 days after the due date (basically 4% if no payment is received). If the balance remains unpaid on day 31, a daily penalty will apply (4% per year on the total). If, for example, a company fails to pay its VAT for 13 months, a penalty charge of 8% will be imposed. Also, firms should be aware that interest on overdue taxes will be charged at the Bank of England base rate in addition to 2.5%.

Even if companies can’t pay their VAT bill, they can file their return on time and contact HMRC for a time-to-pay arrangement. Interest charges on overdue payments will be frozen if an instalment payment plan is agreed to.

After being notified by HMRC of a late filing or late payment penalty, businesses retain the right to appeal. They can either request HMRC to review the decision internally or appeal it to the First-tier Tax Tribunal.

Camilla Formicola

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