Everything you need to know about HMRC’s VAT penalties regime change

21 November 2022  |   5 minutes read
Finance team discusses HMRC vat penalties
Finance team discusses HMRC vat penalties

From January 2023, there will be substantial updates to HMRC VAT penalties regime.

These changes are being brought in to harmonise HMRC’s penalties, as currently, there is no consistency across the tax system. For example, filing your annual self-assessment return one day late results in an instant £100 fine. At the same time, there are many instances where the late filing of a VAT return for the first time doesn’t result in any charges.

The incoming VAT penalties regime makes it easier to comply over the long term. But you’ll need to be prepared for when the change comes in.

Summary of the existing VAT penalties regime

The existing VAT penalties regime comprises late submissions and late payments being treated uniformly.

Grace is shown for businesses that default for the first time. But fines arise if further deadlines are missed in the ensuing tax year. These are calculated based on the number of defaults within the last year and your turnover. Fines can be as high as 15% of outstanding VAT.

In extreme circumstances, this can result in companies defaulting for the second time in 12 months being charged 15% even if they file their returns just one day late.

Overview of the incoming VAT penalties regime changes

The new regime will apply from 1 January 2023. Changes were initially planned to come in from April 2022 in line with the MTD for VAT rollout. However, they were pushed back due to concerns that HMRC’s IT systems would not be able to cope.

For the first time, late payment and filings of VAT will be treated separately. Fines will be proportionate to non-compliance.

Late filings

The late filing element of VAT penalties will be a points-based system. Businesses receive a point for each submission deadline missed.

A £200 penalty becomes payable once businesses receive four points. For example, you will be penalised if you fail to file four quarterly VAT returns on time.

Points expire after two years. So occasional failures aren’t treated as persistent non-compliance. Any points balance resets to zero when the following conditions are met:

  • Demonstration of a continuous period of compliance (quarterly VAT submissions must be successfully made over a period of 12 months)
  • HMRC submissions across all taxes within the last 24 months must be filed (it doesn’t matter if any of these were initially late),

Late payments

Companies that pay their VAT liabilities late will have to pay a percentage penalty based on the value of outstanding monies owed.

  • No fine if outstanding liabilities if settled within 15 days of the due date.
  • Businesses incur a 2% fine on the values of taxes owed after 15 days.
  • Taxes still owed after 30 days will be levied with a 4% fine.

Additionally, interest is payable on late paid taxes at a rate of 2.5% on top of the Bank of England base rate.

How CFOs can best equip themselves for the VAT penalties regime change

In the run-up to the VAT penalties change, you should ensure your business has a clean record with HMRC across all taxes. This puts you in the strongest position if you fall foul of the new regime.

Payroll taxes are notoriously fiddly and easy to get wrong. Particularly given the recent NIC changes. You should get your finance teams to fully reconcile NIC payroll balances to make good on any outstanding liabilities.

Additionally, if you don’t do so already, you should set up payment of VAT returns via direct debit so that HMRC takes funds automatically. It takes around three working days for mandates to be processed. So do this around a week before your next VAT return is due.

You should also get your finance team to set up recurring calendar tasks (and make sure they are added to your calendar, too) around two weeks before VAT returns fall due. This means that their completion will always be prioritised with sufficient time to complete them accurately.

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