Newly introduced penalties within the VAT eco-system

Default Surcharges replaced by separate penalties

For VAT accounting periods beginning from 1 January 2023, the 2%, 5%, 10% & 15% default surcharge regime was replaced with a ‘points system’:

• Each VAT return submitted late will result in one late submission penalty point
• Once a penalty threshold is reached, a £200 penalty and a further £200 penalty for each subsequent late submission will be applied
• The late submission penalty points threshold will vary according to your submission frequency:

• You will be able to reset your points back to zero if you:
  • submit your returns on or before the due date for your period of compliance and
  • make sure all outstanding returns due for the previous 24 months have been received by HMRC

Percentage based charge for late payment of VAT

• Up to 15 days overdue – No penalty if VAT paid in full or a payment plan is agreed to on or between days 1 and 15
• Days 16 to 30 days overdue – Penalty at 2% on the VAT owed at day 15 if VAT paid in full or a payment plan is agreed to on or between days 16 and 30
• 31 days or more overdue – Penalty at 2% on the VAT owed at day 15
• + 2% on the VAT you owe at day 30
• + penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance, calculated when the outstanding balance is paid in full or a payment plan is agreed

Making Tax Digital Penalties

HMRC has announced a range of penalties than may be applied where VAT returns are not fully MTD complaint.  These include:

• £400 penalty, per VAT return, where the VAT return is submitted on time but not via compatible software.
• £5-£15 daily penalty for not maintaining digital records
• £5 - £15 daily penalty for failure to use digital links to transfer data between pieces of software  
• Inaccuracy penalties will also apply. These will be the VAT under declared/over claimed plus up to 100% penalty. This has not changed as a result of MTD, though it may be more difficult to argue that the error was not due to carelessness meaning penalties may be more common.

Additional Points to Note

• Further a new approach to charging interest on late-paid VAT is being introduced. Interest will be charged at 2.5% above Bank of England base rate on outstanding tax, while interest due on repayments will be paid at 1% less than Bank of England base rate, subject to a minimum of 0.5%.
• The points-based system for late submissions is directed towards the minority of taxpayers who persistently miss their submission obligations. Further, the accumulated points expire after a designated period. This system is aimed to be more lenient than the current draconian default surcharge system.
• As a first-year concession until 31 December 2023, the first late penalty charge will not be issued by HMRC if all tax owed on a return is fully paid within 30 days of the due payment date or a suitable time to pay arrangement is made.

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