Preparation needed now to avoid the new HMRC VAT penalty regime

5 Jul 2022

R&D Tax Credits

The new penalty regime for late submission of VAT returns and late payment of reported VAT liabilities comes into effect on 1 January 2023, but some may need to take certain steps to be ready.

HM Revenue & Customs (HMRC) guidance on the new regime is limited so far, but a further update is expected in December. What we do know currently is that:

  • For VAT periods starting on or after 1 January 2023, the new penalties will apply.
  • The new system is based on points allocated for instances of late filing.
  • The new late submission penalty will apply even for nil or repayment VAT returns.
  • Penalties starting from £200 will be levied when a penalty points threshold has been reached (four points for those filing returns on a quarterly basis).
  • The late payment penalty rate is based on the number of days that have elapsed since the payment was due.
  • Payments up to 15 days late will not trigger a penalty, although we don’t yet know how this will apply in particular to payment on account businesses.
  • Penalty rates for late payment will be 2%, 4%, or 8%, depending on the number of days late.
  • The first late payment penalty will not apply in the first year following introduction of the new rules, provided that the VAT payment is received in full within 30 days of the due date.
  • As well as penalties, late payment interest of the Bank of England base rate plus 2.5% will be levied with no grace period for interest.
  • A new repayment interest will be paid by HMRC on VAT amounts owed. The rate will be the Bank of England base rate less 1%, with a minimum of 0.5%. When this will apply will depend on the circumstances and further guidance is awaited.

Nick Hart, VAT Director, and a member of the firm’s Land and Rural Practice Group, says:

“There are several interesting aspects to the new penalty regime, not least that it addresses late filings and late payments separately, and therefore two different penalties could be incurred. The fact that penalties will be levied for late filing, regardless of what the VAT return reports, is one that could catch many out and so now is a good time to revisit legacy VAT registrations that may have been left to wither on the vine, to get those de-registered where applicable, or to ensure the filings are brought and kept up-to-date.

“Farming businesses who regularly report VAT repayment positions on their return will also be at risk of the late filing penalty under the new regime, so diligence is required to ensure all returns are filed by the appropriate due dates.

“The interest payable to taxpayers owed VAT refunds is also significant. It remains to be seen exactly how HMRC will implement this and whether it will indeed apply to those taxpayers who are always in a VAT repayment position.”