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Farewell to the VAT default surcharge regime in 2023

Hayley Hill, Senior Manager, VAT and Customs Duty services
21/01/2022
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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.

Late submission penalties

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:

Submission frequency Penalty threshold
Annual 2 points
Quarterly 4 points
Monthly 5 points

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:

  1. A period of compliance; and
  2. The taxpayer has submitted all submission in the previous 2 years (even if late).

The period of compliance is:

Submission frequency Period of compliance
Annual 24 months
Quarterly 12 months
Monthly 6 months

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:

Submission frequency Time limit for levying a point
Annual 48 weeks
Quarterly 11 weeks
Monthly 2 weeks

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.

Late payment penalties

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.

First penalty

  • No penalty if the tax is paid within 15 days after the due date.
  • If the tax is unpaid after day 15 the penalty is 2% of the tax outstanding.
  • If the tax is unpaid after day 30 the penalty is 4% of the tax outstanding.

Additional/second penalty

  • If the tax is unpaid after 31 days an additional penalty accrues on a daily basis at a rate of 4% per annum until the tax is paid.

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.

Days after payment due date Action by taxpayer Penalty
 0-15 Payments made, or TTP is proposed by day 15 and then agreed No penalty
16-30 Payments made, or TTP is proposed by day 30 and then agreed 2%
Day 30 Some tax is still unpaid, no TTP agreed 4%

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.

Late payment interest (LPI)

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:

  1. the last day the payment was due to be received; or
  2. the day it was received.

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.

In summary

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:

  • Submit the return by the due date, even if you cannot afford to pay as this mitigates the late submission penalties.
  • Late submission penalties will reset upon good compliance over a period of time.
  • Where you cannot pay the liability by the due date and you need extra time, contact HMRC at the earliest possible opportunity to agree a TTP arrangement.  The longer it takes to do this, the higher the late payment penalty will be.

If you would like to discuss the new penalty regime, please contact your usual Crowe adviser or Robert Marchant.


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Contact us

Robert Marchant
Robert Marchant
Partner, VAT and Customs Duty services
London
Rob Janering
Rob Janering
Partner, VAT and Customs Duty services
London
Robert Warne
Rob Warne
Partner, Head of VAT and Customs Duty services
London