From 1st January 2023, the HMRC is introducing a new system for Penalties for late submission of VAT Returns and Late payment of VAT. The new system of interest calculation on late payment of VAT by Taxpayers to HMRC and vice-versa is also been introduced.
We will cover the following points in this blog:
1) Penalty on Late filing of VAT Returns.
2) Penalty on Late Payment of VAT to HMRC.
3) Interest on Late Payment of VAT to HMRC / Repayment from HMRC.
4) Existing Default Surcharges scheme.
1) Penalty on Late filing of VAT Returns:
Under the new system, the penalty is calculated as per the penalty point system.
Each time a taxpayer misses the deadline to file a VAT return, HMRC will allocate 1 point.
Submission Period | Points Threshold |
Annual | 2 Points |
Quarterly | 4 Points |
Monthly | 5 Points |
Once you reach the penalty threshold (as given above) you will be charged a penalty.
The penalty is fixed amounting to £200.
All future missed deadlines will trigger a penalty.
Please Note that points can be allocated even in cases of NIL and Repayment VAT Returns.
Cases in which Penalties Points will NOT be Allocated:
1st VAT return (New VAT Registration)
Final VAT return (After Cancellation of VAT Registration)
One-off returns covering periods other than a month, quarter or year.
How to Reset Penalty Points?
To reset the Penalty points to 0, you have to meet the following 2 conditions:
1) Submit any outstanding returns due in the last 24 Months.
AND
2) Meet deadlines or submit your returns on time for a specified period (as given
below)
Specified period to Meet deadlines:
Submission Period | Specified Period |
Annual | 24 Months (i.e. 2 Annual Returns) |
Quarterly | 12 Months (i.e. 4 Qtly Returns) |
Monthly | 6 Months (i.e. 6 Monthly Returns) |
2) Penalty on Late Payment of VAT:
There are 2 penalties that will attract in case of late payment of VAT to HMRC:
a. Fixed Penalties, and
b. Daily Penalties
Penalty Chart:
Days (Overdue) | Fixed Penalty | Daily Penalty | Remarks |
0-15 Days | Nil (Regardless of the number of Occurrences) | NA | A general exclusion is also there where a taxpayer agrees to a Time To Pay Agreement with HMRC. |
16 – 30 Days | 2% Penalty (on the unpaid amount on day 16) | NA | HMRC will not apply this rule till 31st Dec 23 to make the transition smooth into the new scheme. |
31 days – more | 2% penalty (on the unpaid amount on day 16) + 2% penalty (on the unpaid amount on day 31) *If nothing has been paid on day 31 then a total of 4% penalty will be charged | - 4 % per annum (on the unpaid amount on day 31st) - calculated from day 31 till the date of payment. | E.g.: If VAT is unpaid for 13 months, then a 4% fixed Penalty & 4% daily penalty (for 12 months) totalling 8% penalty will be charged. |
Case study for understanding:
Mr. A is a registered taxpayer under VAT in the UK. His total VAT liability is £10,000. The due date to pay the VAT is on 7th May 2023. Following is the payment made by Mr. A.
Situation 1: He pays full VAT liability on 25th May 23.
- Total Days overdue 18 days
- Thus 2% penalty will be charged amounting £200 (10,000 x 2%)
- However, HMRC will not apply this rule till 31st Dec 23 to help smooth the business
transition into the new scheme.
- Thus, NIL Penalty
Situation 2: He pays part VAT liability of £2,000 on 25th May 23 and the remaining £8,000 on 20th June 23.
Fixed Penalty :
- Unpaid amount on day 16 (i.e., 23rd May 23) is £10,000.
- Unpaid amount on day 31 (i.e., 7th June 23) is £8,000.
- 2% penalty on unpaid amount on day 16 = £200 (10,000 x 2%)
- 2% penalty on unpaid amount on day 31 = £160 (8,000 x 2%)
- Total fixed penalty = £360 (200 + 160)
Daily Penalty :
- Actual date of payment is 20th June 23
- Thus, the total days overdue is 44 days.
- Daily penalty will be charged for 13 days (44 minus 31 days) on the unpaid amount on
day 31 @ 4% p.a.
- Daily Penalty = £11.397 (4% x 13/365 * £8000)
3) Interest on Late Payment of VAT to HMRC / Repayment from HMRC.
a) Interest on Late payment to HMRC:
o Interest will be charged at Bank of England Base Rate (+) 2.5%.
o Interest will be 6% per annum (As of early Jan 23 Base rate is 3.5%).
o Interest will be charged from the payment overdue date till the date of payment.
o E.g.: The VAT payment due date is 7th May 23 and the date of payment is 25th May 23.
The total overdue days will be 18 days (considering 8th May as the day1 for overdue).
o Interest will be applied to :
i. Late payment of VAT in VAT Returns.
ii. Amount due under HMRC Assessments.
iii. Voluntary disclosures of VAT payable to HMRC.
iv. Late POA (Payment of Account) installments.
v. Overdue VAT Penalties.
b) Interest on Repayment from HMRC:
o If HMRC pays late to the taxpayer, interest will be charged on repayment to taxpayer.
o When HMRC is more than 30 Days late interest will be charged.
o This also includes repayments claimed on voluntary disclosures.
o Interest Rate will be Bank of England Base Rate (-) 1%.
o Interest will be 2.5% per annum (As of early Jan 23 Base rate is 3.5%).
o Minimum 0.5% interest will be paid.
When the interest on the repayment starts depends on whether or not the VAT being repaid has already been paid to HMRC on a VAT return.
If VAT paid already, the start date will be later of
i) Date of VAT originally Paid, or
ii) Deadline for the period in Question.
OR
If VAT not been paid already, the start date will be later of
i) Date of VAT Return Submitted, or
ii) Deadline for the period in Question.
HMRC may setoff VAT repayment with the different tax unpaid to HMRC. In this case end date of interest will be date of setoff.
4) Existing Default Surcharges.
o All businesses will start with a "clean slate" in regard to VAT late filing and payment
penalties as of 1 January 2023.
o There will be no transitional arrangements.
o Returns with starting date prior to 1st Jan 23 will still be covered as per the Default
Surcharge scheme.
o HMRC will continue to issue and charge penalties and interest as per the default
surcharge scheme for prior period returns.
Conclusion:
The new system for Penalty and Interest as issued by HMRC is intended to be less punitive. It is always advised to comply with the deadlines within time to avoid any kind of penalty and interest. We at Punchhole make sure of that to take the burden of due dates from you so that you can do the business stress-free.
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