2023 VAT penalties

After the joy of the festive season, 2023 will see the unfortunate introduction of new VAT penalties as we move away from the longstanding default surcharge regime.

For VAT periods starting on or after 1^st January 2023, new penalties will apply should you file a late VAT return, or if you are late paying your bill. There will also be changes in the way interest applies to late repayments by HMRC.

What you need to know

• The new late filing penalties will be points based – you will receive a point for each VAT return that you file late.
• Once these points reach a certain threshold, a fixed £200 penalty will be charged.
• Your threshold depends on how often you file you VAT returns – four points for quarterly, five for month and two for annually.
• Once you reach your penalty threshold, a further £200 penalty will be issued for every additional late VAT return.

There is some good news – it is possible for points to expire. If you are below your penalty threshold, your points will automatically expire after 2 years. If you have reached your penalty threshold, then your points will only expire after a ‘period of compliance’.

Period of Compliance

• Requires all returns for a certain period of time to be filed on time
• All outstanding VAT returns for the past two years to have been submitted

Once these conditions have been met, your points will reset to zero.

Important Information

Under these new rules, repayment traders and taxpayers who are filing nil returns will be in the scope of late filing penalties for the very first time. Unlike the existing practice of default surcharge, there will be no connection between the amount of any late filing penalty and the VAT due on the return.

Late Payment

The new late payment penalties that have been introduced are designed to encourage taxpayers who are struggling to pay to reach out to HMRC sooner rather than later.

There are two penalties that you should be aware of, and they are based on how late payment is;

1. A first penalty of 2% of the VAT unpaid at day 15, and a further 2% of the VAT unpaid at day 30.
2. A second penalty starting at day 31, charged daily based on an annual rate of 4% of the outstanding amount.

In the case of both penalties, it is encouraged that you agree a Time to Pay (TTP) agreement with HMRC. It will be treated in the same way as payment as it will essentially ‘stop the clock’ on the penalty on the date the TTP application is made. If the terms of your TTP are broken, full penalties will be charged as if the agreement had never existed.

Under the new rules:

• paying or requesting a TTP within 15 days of the due date means no penalty arises.
• In the first year the rules are in place there will be a ‘period of familiarisation’, with HMRC not charging the first leg of the first penalty (i.e. the 2% at day 15) from January 1 until December 31, 2023.
• In that period, taxpayers will be able to pay their VAT bills up to 30 days late without incurring a penalty (though interest will still be charged).

Interest Changes

Late payment interest for VAT will be brought in line with other taxes, being charged at the Bank of England base rate plus 2.5%.

The existing repayment supplement will be withdrawn for VAT periods beginning on or after January 1, 2023. Instead, a much less generous repayment interest will be payable by HMRC at the Bank of England base rate minus 1% (with a minimum of 0.5%).

We would recommend that your read guidance from HMRC on how to prepare for these changes by clicking here.

We will be in contact with clients whom we feel will be affected by this, however, if you have any questions in the meantime, please don’t hesitate to contact us.