Everything you need to know about the new VAT penalties and interest system

VAT penalties

HMRC has launched a new VAT penalties and interest system that came into effect on 1 January 2023. This affects all VAT registered business.

This new VAT penalties and interest system that HMRC has introduced changes how penalties are applied as well as how interest is calculated and paid.

So if you are a business owner worried about this new thing HMRC has hurled at you, then you are in the right place, because in this blog we will explain everything you need to know about this.

What changed in the VAT penalties ?

In brief, the VAT default surcharge system is replaced with a new system that treats as separate the penalties for late submission of VAT and late payments of VAT. This new system also changes how interest is calculated for late VAT payments.

HMRC thought to this in order to differentiate between businesses that are always on time and may slip up occasionally from businesses that are consistently disorganized and late. In this new approach to how HMRC looks at businesses, those businesses that are only occasionally late will be rewarded, while those of latter category will be applied a more severe penalty.

This keeping track of good behaviour when it comes to your VAT obligations is done by HMRC via a points system. As such, every time your business is late in filing its VAT return, HMRC will allocate it 1 point, just as driving licence ‘points’ work. Your points for late returns will expire after specified period has elapsed unless you go over the penalty thresholds.

What businesses are affected by the new VAT penalties and interest system ?

All businesses submitting VAT returns starting on or after 1 January 2023 are affected by these changes. Please note that as business owner it will be important to bear in mind that these changes may also affect your tax planning strategy and potential savings from earlier payment dates.

How does the new VAT penalties system work ?

With these new changes, HMRC has introduced  a points-based system for late submission penalties intended to encourage and incentivise businesses to comply with their VAT reporting obligations as follows:

If your business is up to 15 days overdue

You will not be charged a penalty if you pay the VAT you owe in full or agree a payment plan on or between days 1 and 15.

If your business is between 16 and 30 days overdue

You will receive a first penalty calculated at 2% on the VAT you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.

If your business is 31 days or more overdue

You will receive a first penalty calculated at 2% on the VAT you owe at day 15 plus 2 per cent on the VAT you owe at day 30.

You will receive a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full or a payment plan is agreed.

How does this point system work with respect to VAT ?

A penalty will be charged when your total equals these thresholds:

Submission period Points threshold
Annual 2 points
Quarterly 4 points
Monthly 5 points


VAT returns which do not incur penalties

In certain cases your business will not incur penalties:

  • First VAT return if you’re newly VAT registered
  • Final VAT return after you cancel your VAT registration
  • One-off returns that cover a period other than a month, quarter or year.

 

How does the resetting of points work ?

The penalty points that you have accumulated will not automatically expire once you have triggered a penalty. Instead, to reset the clock you have to meet a longer test of good compliance (this means submitting everything on time) for a specified period of time and submit any outstanding returns due in the prior 24 months. The good compliance period will depend on your return cycle as below.

Submission time-frame Compliance period
Annual 24 months
Quarterly 12 months
Monthly 6 months

 

What are the consequences of this new VAT penalty system ?

Since this new system calculates the penalty based on how often you are late in submitting and/ or paying your VAT obligations, the more often you slip up, the higher the penalties you will incur. The good side of this is that if your business meets its obligations within the given timeframe, all penalty points are reset to zero and no further action will be taken against you.

This is not all bad news however. There are advantages and benefits associated with paying your VAT obligations sooner rather than later. Paying early means fewer late payment fees, as well as interest due on top of those fees if they are not paid within 30 days of filing a return or making an adjustment request after filing one’s return.

For those who do pay late but still manage to file their returns before the deadline, there are still ways they can reduce their overall financial burden by paying off any outstanding taxes before incurring additional costs in interest charges or late payment fees.

How to avoid VAT penalties

Of course, the best way to avoid extra costs like penalties and interest is to file your VAT returns and pay your VAT obligation on time is. This could be easily done if every month you save the VAT amount in a separate account, to avoid spending it by mistake. In this way, when payment is due, all you have to do is take this amount from the account you have been saving it in and send it to HMRC.

But if you find yourself in the unfortunate situation that you can’t afford to pay your VAT bill, it is still best to file your return on time (and thus avoid the risk of £200 penalties) and call HMRC to arrange a Time To Pay Agreement.

At the moment, even though the new system has come into operation, HMRC have indicated that they intend to allow a ‘period of familiarisation’. This means that businesses will not be charged a first late VAT payment penalty (up to 30 days late) until after 31 December 2023. Rather, businesses will be allowed to take time to get used to these new changes.

How can LAS Accounting help ?

LAS Accounting Ltd can look after your VAT returns and compliance, saving you time and money to focus on doing what you do best – running and growing your business. We can also help you understand your business finances, monitor your cash balances, plan for future tax liabilities and pinpoint trends to help support important business decisions.

Now might be the ideal time to engage the services of an accountant to do all the work for you and provide you with all the accounting advice you need.

Don’t hesitate to get in touch for any further enquiries at: info@las-accounting.co.uk

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