As the year-end approaches, businesses need to be aware of the changes for accounting periods starting on or after 1 January 2023 regarding VAT penalties and late submissions.
These changes include the introduction of a new penalty regime for late submission of returns and late payments, the end of the Default Surcharge, and the harmonisation of Interest, with the introduction of Repayment Interest which will replace Repayment Supplement.
Within this article, we explore these areas more in-depth and outline the impact these changes may have on businesses.
An overview of the penalty changes
The new penalties cover late submission and late payment, and whilst initially applying to VAT, will also apply to Income Tax Self-Assessment (ITSA) from 2024. In addition there will also be changes to VAT interest to align more closely with the current ITSA and Corporation Tax Self-Assessment interest regimes. The new system is designed to be fairer and lenient towards individuals who occasionally make mistakes, while still imposing penalties on those who intentionally evade their responsibilities.
The late payment penalties will be charged at different rates based on when the payment is received, making them more proportionate to the length of time the payment is outstanding.
|When||Who||First Impacted Obligation|
|1 January 2023||VAT customers||Their first VAT return for a VAT accounting period starting on or after 1 January 2023|
|6 April 2024||
ITSA customers with business or property income over £10,000 per year, who are required to submit their returns via Making Tax Digital (MTD)
|Their first tax year or accounting period starting on or after 6 April 2024|
|6 April 2025||ITSA customers not mandated to submit their returns via MTD||Their first tax year or accounting period stating on or after 6 April 2025|
Late submission penalties
The new points-based system is the same across VAT and ITSA, with points accruing separately for the both of these. Taxpayers will receive a point for each late submission, and once a penalty threshold has been met, a fixed penalty of £200 will be issued, with another £200 for every subsequent late submission.
The threshold will vary according to the filing frequency.
|Submission frequency||Penalty threshold|
Example – quarterly return
If you file your VAT returns quarterly, with the return for the quarter ended 30 April 2023 being late (1 point), followed by:
- the 31 July 2023 return being on time (remain at 1 point),
- and the 31 October 2023 and 31 January 2024 both being late (points 2 and 3),
- then again a late return for the quarter ended 30 April 2024 (4th point),
- then the financial penalty of £200 will first be applied on the fourth late submission for the 30 April 24 VAT return.
Any subsequent late returns after this date would also have a £200 penalty applied (whilst the penalty points remain above 4).
One important point to note here is that, unlike with the old default surcharge regime where penalties were based on the percentage of the liability shown on the VAT return, the penalty is a fixed £200 regardless of the VAT liability and will therefore apply to both nil returns and returns where a repayment is due to the taxpayer.
Can points be removed?
Resetting multiple points
If a taxpayer has reached the penalty threshold total points can be reset to zero at any time provided the two conditions outlined below are both met:
- Taxpayers must complete a period of compliance, i.e. submitting all returns on or before the due date. The compliance period is based on the return submission frequency, as identified in the table below:
|Submission frequency||Period of compliance||Number of compliant returns to make|
Resetting individual points
If you have not reached the penalty threshold, then each individual point will automatically expire after 24 months.
Late payment penalties
The new late payment penalties are built around the idea that the sooner a taxpayer pays their liability, the lower the penalty rate will be.
There are now 2 late payment penalties:
The first penalty is based on a set percentage of the payment outstanding up to day 30, and the second penalty is calculated on amounts outstanding from day 31 until this is paid in full.
|Days after Deadline||Customer Action||Penalty Position|
|0 to 15||If you pay in full or arrange a payment plan or between days 1 and 15||No late payment penalty charged|
|First Penalty||16 to 30 inclusive||If you pay in full, arrange a payment plan or part pay on or up to day 30||First penalty calculate at 2% of what was outstanding at day 15|
|31||If you pay in full, arrange a payment plan or part pay on or after day 30||First penalty calculated at 2% of what was outstanding at day 15, plus 2% of what is still outstanding at day 30|
|Second Penalty||Day 31 plus||Until you pay in full or arrange a payment plan||A second penalty is calculate at a daily rate of 4% on APR for the duration of outstanding balance|
Period of familiarisation
HMRC have given taxpayers time to get use to the changes, meaning they will not charge a first late payment penalty until after 31 December 2023 if you pay in full, or agree a time to pay arrangement within 30 days of the payment due date.
Late payment/repayment interest
The following changes were made for VAT periods starting from 1 January 2023:
|Late Payment Interest (LPI)||Nil% – Currently LPI is not charged on late payments for VAT returns.||Interest will be charged on all late payments of VAT – calculated at a rate of 2.5% + the BoE base rate (base rate currently at 4%).|
|VAT Repayment Interest (RPI)||5% – Repayment supplement for failing to make repayment within 30 days of the claim. The payment or refund due to the taxpayer is 5% of the amount due to be paid or refunded or £50, whichever is greater.||Repayment Interest replaces the Repayment supplement 3% – RPI will be paid at the BoE base rate less 1% (subject to a minimum 0.5% rate). HMRC will pay RPI on any tax due to be repaid to the customer (from day +1 of the later of the payment deadline for the return, and when the repayment return was submitted).|
Those business which occasionally submit a VAT return or make a payment less than 15 days late will benefit from the new regime, as they will only face minor penalties and interest that is likely caused by mistakes or cash-flow related issues.
On the other hand, those businesses that are genuinely struggling due to the cost-of-living crisis and are unable to pay their VAT bills, the new regime may have an adverse impact. If they end up paying more than 30 days past their due date, the penalties they could incur could potentially cause major setbacks.
This article was written by Charlotte Page, a Senior Manager and VAT expert within Price Bailey. If you have any questions related to the new VAT Penalty Regime and how it will impact your business, please contact Charlotte using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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