New VAT penalty regimes

• United Kingdom

• Tax planning and consultancy

29-12-2022

For VAT accounting periods commencing on or after 1 January 2023, the default surcharge regime will be repealed and replaced with two new regimes; a new penalty regime for late filing of VAT returns (set out in section 116 and Schedule 24, Finance Act 2021) and a new late payment regime for VAT (set out in section 117 and Schedule 26, Finance Act 2021).

In this briefing, we summarise the main features of the new regimes, compare them with the default surcharge regime which they will replace, and set out the key considerations for businesses.

Late submission of VAT returns

Under the new regime, if a person fails to make a VAT return on time, that person is liable to one late submission penalty point for the relevant group of returns. The legislation provides for various penalty points thresholds, depending on whether the taxpayer submits returns on an annual basis (in which case the threshold is two), a quarterly basis (in which case the threshold is four) or a monthly basis (in which case the threshold is five). When the relevant threshold is reached, the taxpayer receives a penalty of £200, followed by a further £200 penalty for each subsequent late return. Each penalty must be paid within 30 days.

Broadly, a penalty point for a group of returns expires two years after the first day of the month after the month in which the relevant failure occurred (provided, immediately before the end of that period, the taxpayer has not accumulated the maximum number of penalty points for that group of returns).

A taxpayer’s penalty points for a group of returns expire when the taxpayer has made each return in the group on or before its due date for a certain length of time (24 months for annual returns, 12 months for quarterly returns and six months for monthly returns), and the taxpayer has made all the returns in the group whose due date fell in the preceding period of 24 months (whether or not those returns were made on time).

Late payment of VAT

Under the new regime, taxpayers must pay the following penalties in respect of late payments of VAT:

• a first penalty of 2% of the outstanding VAT if the VAT is paid between days 16 and 30 after the due date, or 4% of the outstanding VAT if the taxpayer fails to pay the VAT by day 30 after the due date; and
• a second penalty of 4% per annum if the VAT is not paid within 30 days of the due date, calculated on a daily basis until the VAT is paid.

Time stops running for the purposes of calculating these penalties when the taxpayer applies for a time to pay arrangement which is later agreed (provided the taxpayer does not later break the agreement).

HMRC’s guidance indicates that, to give taxpayers time to get used to the changes, HMRC will not charge a first late payment penalty for the first year (from 1 January 2023 until 31 December 2023), if the taxpayer pays in full within 30 days of the payment due date.

In addition to the penalty regime outlined above, from 1 January 2023, HMRC will charge late payment interest (calculated as the Bank of England base rate plus 2.5%) from the date the payment is due to the day the payment is made in full.

Comparison with the default surcharge regime

Currently, a single default surcharge regime applies to both late submission of VAT returns and late payments of VAT.

Under the current regime, HMRC sends a taxpayer which defaults (due to late submission of a VAT return or late payment of VAT) a surcharge liability notice, which warns the taxpayer that if they default in respect of an accounting period ending within a 12 month surcharge period, they may have to pay a surcharge.

If a taxpayer defaults during a surcharge period, and there is VAT outstanding for the tax period in default, HMRC sends a default surcharge assessment, as well as a surcharge liability notice extension, which extends the surcharge period. The default surcharge is calculated as a percentage of the VAT that is unpaid at the due date. For the first late payment during a surcharge period, the surcharge will be at a rate of 2%, and then it will increase progressively to 5%, 10% and 15% for further payment defaults in a surcharge period.

There is no liability to surcharge if the taxpayer submits a nil or repayment return late, or pays the VAT due on time but submits the return late. In contrast, the new regimes mean that the late submission of VAT returns (including nil and repayment returns) attracts penalty points and potentially financial penalties, whether or not there is any late payment of VAT.

The new regimes also mean that penalties for late payments of VAT are applied more quickly, beginning 16 days after the first late payment is due, rather than only applying during a surcharge period which has been triggered by a previous default.

Appeals

Taxpayers may appeal against HMRC decisions regarding liability to a late submission penalty point, late submission penalty or late payment penalty, or the amount of any late payment penalty. The taxpayer is not required to pay a penalty before an appeal against the assessment of the penalty is determined.

There is a reasonable excuse defence to liability to a late submission penalty point, or late submission or late payment penalty.

Next steps

In contrast to the current default surcharge regime, the new regimes may encourage greater and more timely VAT compliance, by imposing financial penalties for the late submission of returns and imposing financial penalties more quickly in respect of late payments of VAT.

Although HMRC have said that, for the first year, they will not charge a first late payment penalty if the taxpayer pays in full within 30 days of the payment due date, penalties for late payment of VAT will still apply relatively quickly under the new regime and, depending on the amount of VAT involved, the quantum of the penalties could be considerable. Businesses therefore need to ensure they are familiar with the new rules. In addition, dormant VAT-registered businesses may now want to consider deregistration, given the financial penalties that could accompany the late submission of even nil returns.

If you have any questions regarding the new regimes or how they may affect your business, please do not hesitate to get in touch with any of the Eversheds Sutherland contacts listed below.