Penalties for Late VAT Returns and Late VAT Payments

EXISTING DEFAULT PENALTY SYSTEM

For as long as we can remember, HMRC's system for penalising registered entities who are late with VAT payments has been based on an accumulation of 'offences'. This related to late payments rather than late returns, and payments on 2 from any 4 consecutive returns had to be late before the next default would attract a potential penalty. The penalties then rose from 2% of the late VAT up to 15%. Taxpayers finding themselves in a default position could often end up trapped in a cycle of surcharges as HMRC would always allocate payments against the oldest debt, but at least the system meant that isolated defaults most often resulted in no financial penalties.

Interest was only ever charged for VAT on assessments raised by HMRC, so would not usually arise on late payments.

Another point to note is that surcharges only ever arose for VAT periods where a payment of VAT was due to HMRC, so nil returns or repayment returns would not attract any kind of penalty.

A new system is being introduced from 1 January 2023 which will change all of this.

NEW PENALTY SYSTEM

From 1 January 2023 a points-based system is being introduced for late returns, which will include nil and repayment returns. An accumulation of points from late returns will lead to fixed financial penalties of £200 per late return.

There will be a separate penalty regime for late payments, which will once again be based on a % of the VAT paid late, but this time the penalties will start from the first instance of late payment, and the % charged will be determined on how late the payment is.

We'll cover both penalty systems separately below.

PENALTIES FOR LATE RETURNS

Before expanding on this it's worth a reminder as to the deadlines for submission of VAT returns. The majority of registered entities are on quarterly or monthly reporting and the deadline for these is always a month and 7 days after the end of the VAT period. For example a monthly return for September 2022 and a quarterly return for July to September 2022 will both have a filing deadline of 7 November 2022. Entities who are on annual accounting (where a single return is submitted once a year but payments on account are made monthly) have two months from the end of a reporting period to submit their return. Thus a return covering an annual period ending on 30 September 2022 would need to be submitted by 30 November 2022.

From 1 January 2023 any late submitted return, covering any length of reporting period, will attract 1 penalty point. The length of your reporting period will then determine the threshold of points before a penalty arises: for monthly returns the threshold is 5 points, for quarterly it's 4, and for annual returns it's 2. When that threshold is reached, a £200 penalty will be levied automatically. Further £200 penalties will arise for every subsequent late return unless the reporting entity has submitted all returns on time for a set period, which brings the accumulated points down to zero.

For monthly returns, to re-set the penalty points to zero, there must be a period of 6 consecutive returns submitted on time. For quarterly returns this number is 4 returns (a year's worth). For annual returns the following 2 returns need to be submitted on time.

The penalties in this area aren't huge, so it appears that this part of the regime is designed to encourage compliance. We would however expect HMRC to be more likely to choose entities whose returns are consistently late in deciding how to target enquiry activity.

PENALTIES FOR LATE PAYMENTS

The changes in this area are highly significant and all VAT registered businesses will need to take heed, as a lack of care over one return could now lead to penalties, and also to interest charges.

Due dates for payments are always the same date as the return submission deadlines, although where an entity has a direct debit set up for VAT the payment will usually be taken 3 working days after the deadline, but will still be treated as having been paid 'on time'.

The new penalty regime applies a % penalty to any part of the VAT due for a reporting period that is paid late, as follows:

• 1 to 15 days late - no penalty charged if the VAT is paid in full within that period or if a payment plan is agreed by day 15 (for most businesses day 15 will be a month and 22 days after the end of the VAT period);
• Between 16 and 30 days late - the first penalty level is calculated at 2% on the VAT owed at day 15, where this is paid in full or a payment plan is agreed by day 30; and
• 31 days or more overdue - the first penalty in this scenario comprises 2% of the day 15 balance (as above), plus an additional 2% on the value unpaid or not on a payment plan by day 30; a second penalty is calculated at a daily rate of 4% per year from day 31 for the duration of the outstanding balance, levied when the balance is finally paid up or included on a payment plan.

By way of example, for a return with VAT due of £10,000, the penalties arising based on the following payment dates would be:

• Day 12 = nil
• Day 20 = £200
• Day 35 = £400 + £5
• Day 75 = £400 + £49

Note that each return period will be treated separately in terms of late payment penalties. This means that penalties for repeated late payment under this new regime will be less than before, where punitive rates of 15% were possible, but applying the regime to every late payment rather than just those for repeat offenders will mean that more entities will end up paying VAT penalties.

Please note that HMRC have confirmed that a 'period of familiarisation' will be allowed, under which no penalty will be charged on your first late payment up to 31 December 2023, provided this is settled in full by day 30.

INTEREST ON LATE PAYMENT

In addition to the late payment penalties noted above, interest will be charged on overdue VAT until it is paid in full. The rate to be applied will be the Bank of England base rate plus 2.5%, so at the time of writing this would be 4.75%. The current, rather brief, official guidance states that interest will be charged as soon as VAT is overdue. The penalty regime allows a period of grace to day 15 but it would appear that this will not apply to interest charges.

INTEREST ON REPAYMENTS

Finally some good news! On repayment returns HMRC will now pay you repayment interest from the date that the return is submitted or the due date (whichever is later) until the date the repayment is made. The interest rate will be the Bank of England base rate minus 1%, subject to a minimum rate of 0.5%.

HOW TO AVOID PENALTIES

For many businesses VAT return payments represent their largest regular bills, so are key factors in managing cash flow. These payments need to be planned for so it's important both to keep an eye on the VAT balance in your books and to have the discipline to set aside funds to make the payments on time. Using a system such as Xero and keeping it up to date can be a massive help with this.

Also consider setting up a direct debit for VAT return payments, so that the submission of the return automatically schedules the payment (saving you having to remember the payment as a separate exercise). One thing to watch however is that if your return is submitted late and you have a direct debit set up, the direct debit will follow 3 working days later. Therefore if you submit a return on day 11, if there is a weekend before day 14 then 2 more days will be added and payment will occur on day 16, potentially triggering a penalty.