Starting January 1 2023, the VAT penalty points system has changed from the earlier surcharge system to a new points-based system with specific penalties for late submissions of returns versus late payments.
The goal overall is to make the process less punitive as well as easier to understand so that taxpayers have fewer challenges when the time to file comes around.
In this blog post, we break down the basics of the new VAT points system so you know exactly what you will be charged for what kind of offence. And as always, if you have questions, our VAT accountants are here to help.
How VAT penalty points work
Simply put, every time you miss a VAT filing deadline, you get a point. Once you meet a certain threshold number of points, you will be charged a £200 penalty. These thresholds are:
- Annual returns – 2
- Quarterly returns – 4
- Monthly returns – 5
And if you continue to submit VAT returns late after hitting the threshold, you will have to pay another £200 for every delay. There is a way, however, for you to “reset the clock” on those points.
For each type of VAT return, if you successfully complete a compliance period where you submit everything on time and complete any outstanding returns, your points will expire as long as they have not crossed the thresholds mentioned above. These compliance periods are:
- Annual returns – 24 months
- Quarterly returns – 12 months
- Monthly returns – 6 months
And if your VAT penalty points do not touch the threshold, they will automatically expire around two years after the relevant return is due.
From January 1, 2023, all taxpayers started at zero points, including those on a default surcharge. In effect, everyone got a clean slate as the new VAT penalty points system kickstarted.
Non-standard accounting periods
Here are the point rules if HMRC has allowed you to use non-standard accounting periods for VAT:
- More than 20 weeks in length – 2 (same as annual)
- Between 8 weeks and 20 weeks – 4 (same as quarterly)
- 8 weeks or less – 5 (same as monthly)
Changing accounting periods
If you alter your VAT accounting periods with due permission from HMRC, your VAT penalty points and thresholds will be adjusted accordingly.
If you have zero points at the time, no adjustment will be made – and if the adjustment comes out to be negative, HMRC will reset your tally to zero points.
Situations that do not incur VAT penalty points
There are certain VAT-related situations where you do not rack up points, including:
- Your first VAT return after you have registered for VAT
- Your last VAT return after you have cancelled your VAT registration
- One-off returns other than monthly, quarterly or annual returns
However, VAT penalty points will be given for late nil/repayment returns.
How the late payment of VAT penalties work
The later you make your VAT payment, the higher your penalty will be. Let us get into a little more detail:
- Payments up to 15 days late will not trigger any penalty, even if it happens multiple times.
- Payments between 16 and 30 days late will attract a penalty of 2% of the outstanding amount. However, during 2023, HMRC is extending this to 30 days to help businesses adjust to the new regime.
- Payments that are late by 31 days or more will attract a penalty of 2% of the outstanding amount on day 15 plus an extra 2% of the outstanding amount on day 31. Plus, from day 31 onward, a daily penalty of 4% per annum will be charged on the outstanding amount.
- All overdue tax will attract interest at the Bank of England rate plus 2.5%, starting from the due date. This interest will be applied to overdue VAT late filing penalties and late VAT returns, as well as amounts due under Time To Pay arrangements.
How to avoid penalties
The easiest way to avoid VAT penalties is by not being late. In addition, keep the following provisos in mind:
- If possible, set up a direct debit system where HMRC automatically collects whatever money is due whenever deadlines come up.
- If you cannot afford to pay your VAT amount, submit your returns on time as usual and request HMRC for a Time To Pay arrangement.
- During 2023, you will not be charged a first late VAT penalty for a delay of up to 30 days.
- You always have the right to challenge any point/penalty you have attracted within 30 days of being notified if you believe you have a “reasonable excuse” for not filing on time (such as a serious illness/injury or the death of a close family member). You can appeal to the first-tier tax tribunal or ask HMRC to internally review their decision.
Repayment interest
Starting January 1 2023, you are entitled to repayment interest on VAT owed if HMRC is late to pay. This interest is paid at the Bank of England rate minus 1%, with a minimum of 0.5%.
However, if you have any outstanding VAT returns, HMRC will not pay you repayment interest for those specific periods. There are two ways this can work:
If the claimed VAT was already paid to HMRC, repayment interest is calculated from the latter of the original payment date and the deadline for the relevant period.
If the claimed VAT has not been paid to HMRC yet, the repayment interest period starts from the latter of the relevant accounting period deadline and the date the VAT return/claim was submitted.
Over to you
In conclusion, these are major changes to the VAT system and HMRC is working hard to ensure that the transition is smooth and that adequate educational resources are available to taxpayers everywhere.
Through this system, the goal is to give taxpayers scope to get their payments in order before being charged with monetary penalties and thus to avoid penalising the occasional slip-up.
Prevention is better than cure, of course, so always talk to your accountant about the implications of any point/penalty. We at Lyel Accountants are happy to help you organise your finances so that your VAT returns and payments are on time. Contact us today!
