Ellen Main-Jeffrey, Head of VAT Services at Burgis & Bullock, advises taxpayers not to get caught out by late VAT returns as Penalty Notices are issued under new regime.
Penalty Notices for the late submission of VAT returns under the new regime are now being received by taxpayers.
The VAT Default Surcharge for late payment and/or submission of VAT returns was replaced by a new regime which came into effect from 1st January 2023. The old system of an initial warning for the first default, followed by penalties ranging from two per cent to 15 per cent of the tax due for subsequent defaults has been replaced by a points-based system, much like that used for speeding fines with an upper threshold which depends on the frequency you submit your VAT returns at which point you trigger a penalty.
If you are on Annual Accounting, the penalty point threshold is 2. If you submit quarterly returns, the threshold is 4 and monthly returns it is 5. There are special rules for businesses submitting returns on non-standard VAT periods. A point is given for each late submission and once you reach the threshold, a penalty of £200 is levied and a penalty of £200 is levied for each subsequent default thereafter.
If you have not reached the threshold, then your penalty points automatically expire two years after they are received. However, once you have reached the threshold and penalties are being levied, it is necessary to meet two tests before the points are removed. The first (A) is to complete a period of compliance (between six and 24 months depending on the frequency of your returns) and submitting all returns on time, and (B) all outstanding returns for the previous 24 months are submitted.
With regard to late payments, unlike the previous VAT Default Surcharge which applied to late returns and late payments in the same way, the new regime deals with late payments differently and it depends on how late the payment is.
There is no penalty levied for payments less than 15 days late or if you have agreed a Time to Pay arrangement. Where payments are between 15 and 30 days overdue a penalty of two per cent of the amount outstanding is levied and if it is still outstanding after 31 days or more (i.e. nothing has been paid) then a further two per cent of the amount outstanding is levied, increasing the penalty to four per cent, PLUS a daily penalty on the amount outstanding of four per cent per annum.
And there is more…
In addition to the penalty, Late Payment Interest will be charged on the amount outstanding (including late Time to Pay arrangements) at the Bank of England base rate plus 2.5 per cent.
This new interest charge will also apply to all late payments including assessments, late payments on account and late payments of penalties
The good news is that the penalty does not apply to first VAT returns and final VAT returns and also one-off returns for example when you change your VAT accounting periods. We also welcome the fact that HMRC have said they will apply a “light touch” to this new regime until 31st December 2023, however they do not explain what this “light touch” means in practice, so it will be very important not to be caught out.