New VAT penalty regime – the changes explained
A new VAT penalties regime was brought in this month, and any firms or individuals missing their filing deadline from January 2023 onwards will receive penalty points even if there is no VAT due to be paid.
While this may sound more benign than getting a fine, persistent late filing could lead to more costs as the points add up. You will get one penalty point for each late VAT filing, and these points accrue for every late filing within a specific period. Once you or your business reaches the threshold of points for each time period, which varies depending on how regularly you have to file your VAT returns, you will then face a fine of £200.
How the points system works
The points threshold also varies depending on the frequency you file VAT returns, and how often within that period you file late. For example, if you file your VAT returns annually, the threshold before you get a penalty is just two points. So, filing late two years in a row would mean you hit your threshold and would face a fine.
If you file quarterly, you have a four-point threshold, and monthly you have a five-point threshold. You get a penalty point for each time you file a VAT return late, so if you file quarterly and have previously filed three returns late, then a £200 penalty would be applied if one more return is filed late giving you a fourth point and hitting the threshold.
Removing penalty points
If you do not reach the threshold for your penalty points, then your points will expire automatically and when this happens depends entirely on when your return deadline was. If your filing deadline is a date before the end of the relevant month, your penalty point for that period will expire at the end of that month 24 months later. If your deadline was the end of the month, then any points imposed for late filing will expire 25 months after that date, again providing you have not hit the threshold.
If you have hit the threshold, then you need to keep submitting returns on time for a set period to remove those points and prevent further financial penalties being applied.
How long do I need to comply with the VAT return deadlines to have my points removed?
The companies and individuals who have reached the threshold for points and been hit with a penalty need to file on time for a specific period to clear the points from their record. This is known as ‘the period of compliance’ and how long you need to comply will again depend on how often you file your returns.
For example, those filing annual returns will need to file two returns on time, so it will take 24 months, to clear their points. If you file quarterly, you will need to file four returns on time over 12 months to clear the points, and if you file monthly, then you need to file six returns on time over six months to return to zero points. In addition, you will also need to submit all outstanding returns for the previous 24 months.
However, there is also a new interest penalty imposed for unpaid VAT which will apply for accounting periods starting on or after January 1, 2023. The first penalty would apply if you have not paid the outstanding tax due within 15 days of the date it should have been paid. This would be 2% of the outstanding amount after this period, and if it remained unpaid for 30 days, then the penalty would be “calculated as 2% of the tax outstanding after day 15 plus 2% of the tax outstanding at day 30” according to HMRC. This typically will be a 4% charge at 30 days after the original tax due date.
If the tax is still not paid, then from day 31, a daily accruing penalty at 4% a year will begin to be added to the amount and will only stop when the tax is paid. HMRC will allow taxpayers to request a Time-to-Pay arrangement which will stop the clock on these penalties accruing by agreeing a schedule of payments to deal with the tax due.
You can find out more information about the points regime and any fines that could be imposed, along with how you deal with this points regime if you have a non-standard accounting period, at Gov.uk and about the interest penalties also at Gov.uk.
We can help you
If you have concerns about your compliance with the VAT filing regime, then speak to us and we will work with you to ensure you do not fall foul of the new rules.