VAT default surcharges – All Change!

Background

Under the regime, an inadvertent one-day delay or oversight was seen to be as bad as a far more extended period of deliberate withholding of VAT payments. 40 years on, HMRC are now bringing in changes. The main changes recognise the defaults of non-submission and non-payment.

The changes

The main changes will recognise and split the defaults of non-submission and non-payment and also introduce an interest element. The new regime is a points-based system, designed to take into consideration the length and number of delays over a period of time. The changes will come into effect from VAT returns starting on or after 1 January 2023, (and HMRC plan to roll out the approach for Income Tax Self-Assessment returns for tax years starting on or after 6 April 2024).

How it will work for VAT return submissions

1 - Late submission penalties 

A point will be given for every missed submission deadline. At various points thresholds a penalty of £200 will be charged for that failure and any subsequent failure to submit on time (points will not increase).

The points thresholds are:

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.

Points will have a lifetime of two years, after which they will expire. The period is calculated from the month after the month in which the failure occurred, and once a taxpayer reaches the threshold, all points accrued will be reset to zero when the following conditions are met:

• a period of compliance – submitting returns & payments on time (as outlined in the table above)
• the taxpayer has submitted all returns in the previous 2 years.

2 - Late payment penalties

The new late payment penalty will apply in instances where the return is submitted on time but the payment is not.

First penalty

• No penalty charged 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 at Day 15
• 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 year 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.

For both penalties, HMRC will have the discretion to reduce or not charge a penalty, including where the taxpayer has a reasonable excuse and Taxpayers can appeal both penalty types..

3 - Late Payment Interest (LPI)

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 the Bank of England Base Rate plus 2.5% (and will continue to apply even if there is a Time to Pay arrangement in place).

4 - Repayment Interest (RPI)

HMRC will pay repayment interest on any VAT due to taxpayers, calculated from the day after the due date or the date of submission (whichever is later) and until the day HMRC pays you the repayment VAT amount due to you in full. It will be calculated as the Bank of England base rate less 1%, with a minimum rate of 0.5%.

Key Takeaways – avoid VAT default penalties

• There are now two possible defaults – non-submission and non-payment.
• Business that are typically in a repayment position (eg notably for example farmers) or who submit ‘Nil’ returns can fall foul of the regime and suffer financial penalties. Even if you can’t pay the return, avoid a penalty by submitting on time.
• If you cannot pay the VAT liability by the due date, pay what you can and contact HMRC as soon as possible to seek to agree a Time to Pay arrangement If you cannot pay your tax bill on time: Pay what you owe in instalments - see If you cannot pay your tax bill on time: Overview - GOV.UK (www.gov.uk)
• Interest applies to all unpaid debt so taxpayers need to focus on ensuring VAT liabilities are paid promptly or as soon as possible.
• HMRC say that a ‘light touch’ approach will be taken in the first year to 31 December 2023 if VAT is pad within 30 days of the due date.