HMRC are introducing a new penalty system for the late submission and payment of VAT returns. Although VAT repayment claims will not be subject to late payment penalties, they will be subject to late filing penalties, and so this new system will impact all VAT registered businesses. 

New penalties will replace the existing Default Surcharge system, and have been designed to harmonise the penalty systems for late filing and payment across the taxes that HMRC manage.

The new penalty system will take effect from 1 January 2023.

Interest on VAT balances

VAT interest rules will change and be similar to those which currently exist for other taxes.

When an amount is not paid by the due date, late payment interest will be charged until the date the payment is received.

HMRC will pay repayment interest on either any overpaid VAT or VAT refunds (or both) due to be repaid, provided there are no outstanding VAT returns for other prescribed periods.

Late submission penalties

When a taxpayer misses a submission deadline, they will incur a point. A fixed financial penalty will become chargeable once the taxpayer has reached the points threshold, HMRC have advised this will be £200.00.

The level of points threshold, is based upon the frequency of the taxpayer’s submissions:

  • Monthly – 5 points
  • Quarterly – 4 points
  • Annually – 2 points

Further fixed rate penalties will be issued if the taxpayer continues to miss submission deadlines. They will become liable to an additional fixed rate penalty, each time a filing deadline is missed.

Once compliance is achieved over a set period, based upon their submission frequency, and all outstanding returns due for the preceding 24 months have been received, the penalty points will be reset to zero.

Late payment penalties

The VAT default surcharge will no longer apply.

The new late payment penalty system will consist of two separate elements, the first charge being a flat rate percentage of the balance due and a second charge which will accrue on a daily basis, payable after day 31.

First charge

If the taxpayer contacts HMRC and proposes a Time to Pay arrangement within 15 days of the due date, then no fixed rate penalty will be charged.

  • The flat rate charge will apply after day 16 at a rate of 2% (reduced to 1% if a Time to Pay arrangement is agreed); and
  • If no payment is made by day 31, in addition to the 2% charged on day 16, a further 2% penalty of the balance due will become payable.

Second charge

This will become payable from day 31, interest will be charged on the outstanding amount, at a rate of 4% per annum.

As with other penalties, taxpayers will be able to appeal both the points and penalties, if they have a reasonable excuse for not making the submission on time.

It is expected that, to begin with, HMRC will adopt a light touch approach to the initial 2% late payment penalty during the first year.

Payment support

Outstanding tax bills can be paid in monthly instalments, via a Time to Pay arrangement.

Every Time to Pay arrangement is based on an individual’s financial circumstances, there is no standard agreement and no upper limit on the amount of time that someone can have to pay.

HMRC take into consideration what an individual can afford to pay when calculating how much time they need to pay by using an ‘income and expenditure’ assessment.

M+A Partners are unfortunately unable to set up an online Time to Pay arrangement for our clients. This is because the arrangement must be set up directly by the taxpayer.

Setting up a Time to Pay arrangement

When you contact HMRC to set up a VAT Time to Pay arrangement you will need:

  • Your VAT registration number;
  • Your bank account details; and
  • Details of any previous payments you have missed.

HMRC will ask you:

  • How much you can repay each month;
  • If you can pay in full;
  • If there are other taxes you need to pay;
  • How much money you earn;
  • What you usually spend each month; and
  • What savings or investments you have.

If you have savings or assets, HMRC will expect you to use these to reduce your debt.

If your company is in tax debt

HMRC will discuss your company’s finances with you.

They will ask you to make a verbal proposal, explaining how you will pay your tax bill quickly and feasibly. An adviser will ask questions about your proposal to make sure it is realistic and affordable.

You must reduce your debt as much as possible before entering into a Time to Pay arrangement. This can be done by releasing assets like stock, vehicles and shares.

HMRC may ask company directors to:

  • Put personal funds into the business;
  • Accept lending; and
  • Extend credit.

How long your Time to Pay arrangement lasts

There is no time limit on how long a Time to Pay arrangement can last. How long yours will last depends on how much you owe and what you can afford to pay each month.

Contact HMRC if anything changes that you think affects your Time to Pay arrangement. The arrangement can be made longer or shorter.

If HMRC finds out that something has changed in your circumstances, they may contact you to discuss changing your repayments.

HMRC can be contacted using the Payment Support Service:
0300 200 3835
Monday to Friday, 8am to 4pm

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