HMRC set to introduce new VAT penalty and interest rules from 1 January 2023
Although not widely publicised at the moment, HMRC is introducing a new penalty and interest regime for VAT from 2023. This article explains how the new rules replace the existing VAT default surcharge regime and how the new system will operate.
Firstly, it is important to note when these new rules come into force. The changes are due to apply to VAT periods beginning on or after 1 January 2023. It should be noted that these new rules will also apply to Income Tax Self-Assessment (ITSA) but for accounting periods beginning on or after 6 April 2023 (businesses within ITSA making tax digital) or periods beginning on or after 6 April 2024 (for any other businesses).
The existing default surcharge regime has been criticised over the years for being disproportionate to the length of delay. For example, if an organisation within the 15% penalty band is one day late paying their liability of £100k they would receive a penalty of £15k; the same penalty as if they were weeks or months late in making the payment. The new penalty regime is a points based system, designed to take into consideration the length of the delay as well as the number of delays over a period of time.
A point will be given for every missed submission deadline. At a certain threshold of points a penalty of £200 will be charged for that failure and any subsequent failure to submit on time (points will not increase). There will be separate points totals for VAT and ITSA. The points thresholds are:
In practice, this means that a taxpayer filing a quarterly return can miss a submission deadline three times, upon the fourth missed deadline, a £200 penalty will be charged. A further £200 is then charged for any subsequent defaults whilst the taxpayer remains at that penalty threshold.
Penalty points will have a lifetime of 2 years, after which they will expire. The period is calculated from the month after the month in which the failure occurred, e.g. submission due January 2023, so the penalty point will expire in February 2025.
Once a taxpayer reaches the threshold, all points accrued will be reset to zero when the following conditions are met:
The period of compliance is:
Again, this means that a taxpayer on quarterly returns, that have filed any outstanding returns and met submission deadlines in a twelve month period will lose any penalty points accrued.
There will also be time limits after which points cannot be levied:
HMRC can only assess a penalty within two years after the failure giving rise to the penalty and they have the discretion to not apply a penalty in the first place.
The new late payment penalty will apply in instances where the return is submitted on time but the payment is not. As mentioned previously, this penalty considers the length of the delay in making payment and the penalty increases over time.
A time to pay (‘TTP’) arrangement will stop penalties accruing once it has been agreed with HMRC and it is being honoured by the taxpayer.
From day 31 an additional penalty will start to accrue at 4% per annum
As with the missed submission penalty, HMRC will have the discretion to reduce or not charge a penalty for late payment, including where the taxpayer has a reasonable excuse. HMRC has also announced that a light touch approach will be taken in the first year where the taxpayer is doing their best to comply, HMRC will not assess the 2% penalty after 15 days, allowing taxpayer 30 days to approach HMRC.
The key point in HMRC’s guidance so far is that they are looking at taxpayers to approach them as early as possible to agree any TTP arrangements if VAT liabilities cannot be paid. The penalties increase the longer the taxpayer delays this.
As part of the new penalty regime, HMRC has updating its Late Payment Interest (‘LPI’) rules to bring these in line with other tax regimes.
LPI will be charged on tax outstanding after the due date, starting from the date the payment was due until is it received by HMRC. LPI is calculated as simple interest at a rate of 2.5% above the Bank of England base rate. Where tax is overpaid, repayment interest will be paid by HMRC on any tax due to be repaid from the later of either:
Repayment interest will be paid at the Bank of England base rate less 1%.
It is important to note that LPI will continue to apply, even where there is a TTP arrangement in place.
Overall, the new penalty regime appears to be a fairer system than the default surcharge but this remains to be seen in practice. At the heart of the new measures is a penalty based system with late payments or return submissions accruing penalty points that ultimately lead to financial penalties being levied.
The key points at this stage are:
If you would like to discuss the new penalty regime, please contact your usual Crowe adviser or Robert Marchant.
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