The new penalty system, which was due to come into effect from 1 April 2020, was originally delayed after the end of the first period of MTD filing for the bulk of VAT registered businesses. However, the start dates for both penalty regimes were pushed back to 1 April 2022, to coincide with MTD mandation for all VAT registered businesses.
This second delay to 1 January 2023, is to allow for more time for HMRC to build and test its IT system. The Minister’s written statement said: “This extra time allows HMRC to ensure the IT changes necessary for the new penalties and interest charges can be introduced as effectively as possible, ensuring a high standard of service to customers.”
Under the new regime, there will be much more flexibility. Businesses will have a 15-day grace period in which to pay their VAT bill, during which there will be no penalty at all and if a time to pay agreement is reached, the penalty clock will stop.
The new regime will issue automatic penalties, with no warning messages or default periods when the VAT payment is late by:
- 15 to 30 days – 2% penalty
- Over 30 days – 4% of the late paid tax
- 31 days or more – daily penalties at 4% of the outstanding amount
It is important to note that HMRC has confirmed that when an amount is not paid by the due date, late payment interest will be charged from the date the tax becomes overdue, until the date the payment is received (calculated at 2.5% above the Bank of England base rate).
The new VAT penalty regime will operate on a points-based system for the late submission of returns. For late VAT returns, taxpayers will incur one point for missing a submission deadline, becoming liable to a fixed penalty of £200 only after they have reached a points threshold:
- 2 points, for those submitting returns annually
- 4 points, for those submitting returns quarterly
- 5 points, for those submitting returns monthly
Under the “points means penalties” regime up to three quarterly VAT returns may be late with no penalty, but on the fourth late submission an automatic financial penalty of £200 is issued and every late submission after that threshold will trigger another £200 fine, but those additional penalties will not add points.
Each point will expire when the taxpayer achieves both of:
- No late submissions for a period of compliance; and
- All returns filed for the previous 24 months, even if they have been filed late.