New penalty regime for VAT delayed until 2023

The implementation of a new penalty system for VAT has been delayed by nine months, until 1 January 2023.

This is apparently to allow HMRC to get its IT systems ready. We will provide a more detailed analysis of how the penalties will apply towards the end of the year. However, as an overview, the new system will replace the current default surcharge regime with a two-tier system, that will be closer to the direct tax penalty system.

For late payments of VAT, penalties will be based on the number of days those payments are outstanding:

  • No penalty for payments made within 15 days
  • 2% of the tax outstanding for payments made after day 15, but within 30 days
  • 4% of the tax outstanding for payments made after day 30

Late payment interest (calculated at 2.5% above the Bank of England base rate) will also be payable on tax outstanding after the due date for a VAT return, until full payment is received by HMRC.

For businesses which repeatedly miss submission deadlines, a points system will also be introduced. Every time you miss a deadline you will receive a point, which HMRC will notify you of on each occasion.

After you receive a certain number of points, an initial financial penalty of £200 will be charged. The threshold that must be reached for a penalty to be issued is determined by how often a taxpayer is required to make their submission.

The thresholds are two points for taxpayers submitting annual returns, four points for quarterly returns, and five points for monthly returns.

A similar penalty system has been scheduled to apply to Income Tax Self-Assessment (ITSA), from the tax year beginning 6 April 2024 for taxpayers with business or property income over £10,000 per year (taxpayers who are required to submit digital quarterly updates through Making Tax Digital for ITSA). From 6 April 2025, all other ITSA taxpayers will be included.

Although this guidance covers the basics of these upcoming changes, there are additional rules that may affect how penalty points are issued against you or your business.

If you are concerned about these changes or would like advice on remaining compliant with MTD for VAT and ITSA,
please speak to our team today.

Posted in Blog.