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HMRC Reforms to VAT Return Late Submissions and Payments

All VAT-registered businesses need to be aware of how HMRC has changed how it deals with late returns and payments – in a move widely perceived as positive.

Although late VAT returns and overdue payments related to periods before 1st January 2023 will still be handled according to the previous system, all subsequent returns will be addressed differently.

Of course, the priority should always be to remain on time and compliant with all tax matters, and errors or corrections to returns the tax office believes are deliberate can still be subject to considerable fines and penalties.

Changes to the HMRC Default Surcharge Regime

The prior system has long been criticised due to inconsistencies, and seemingly excessive fines for late returns or payments, even where the values concerned were minimal.

As of January 2023, the way HMRC calculates penalties and fines will be based on a points system, where a one-off delay is less likely to result in a financial penalty.

Penalty Points for Late VAT Return Submissions

Businesses will be issued one penalty point for each instance where they fail to submit a VAT return on time. If this is a recurring issue, the tax office will administer a £200 penalty for every further instance, but only when the business has accumulated over a points threshold.

The number of points required to initiate a fine depends on whether the business files VAT returns monthly, quarterly or annually, as follows:

  • VAT-registered businesses that file monthly will begin to incur fines from five penalty points.

  • Those submitting returns quarterly require four points to be subject to a penalty.

  • Companies filing VAT returns annually will be fined once they have two points.

Where the business needs to file a nil VAT return, they will still incur a penalty point for late submission, although there is a process to apply for penalty points to be removed.

Points expire after 24 or 25 months, depending on the date of the missed deadline, and companies can remove penalty points if they are at the threshold by demonstrating compliance and bringing all affairs up to date for the last two years.

Further information about compliance periods and the conditions necessary to apply for points to be removed is available online.

Penalties for Late VAT Payments from January 2023

The new system also affects how HMRC levies penalties for late payments, separately from the penalty points system for late submissions. There are two potential charges:

  • If a VAT payment is not made by the 15th and 30th days following the due date, the business will incur a 2% penalty charge.

  • From day 31 onward, the business will be charged a second penalty, based on a daily calculation of 4% per year on the outstanding liability.

Second VAT penalties are calculated when the payment is made in full or when the company has a Time to Pay agreement approved by the tax office.

In practice, this means that a VAT-registered business will not pay a late-payment penalty provided they pay their VAT bill in full within 15 days of the due date or set up a Time to Pay agreement.

Interest Charges for Late VAT Remittances

In addition to penalties for late payments, companies will incur interest at 2.5% above the Bank of England's base rate. Interest is payable on any amount not paid by the due date.

HMRC Grace Periods on VAT Penalties

From 1st January until 31st December 2023, HMRC will offer a grace period, where penalties will not be levied, provided the business remits all VAT owing against a return within 30 days of the payment due date.

There are several ways businesses can structure their VAT remittances to ensure they do not incur unnecessary fines and penalties:

  • HMRC accepts direct debit payments, and setting this up to remit the amount within three working days of the due date will ensure your payment is received in time.

  • Partial payments can reduce the penalty payable if cash flow issues or other problems affect your ability to pay in full. Penalties are calculated according to the outstanding value on the 15th and 30th days after the due date, so a partial payment will reduce the penalty value.

  • Time to Pay arrangements are a viable option if you cannot pay on time. However, HMRC retains discretion and may require information about the circumstances and why you need more time to pay.

There are limited 'reasonable excuses' the tax office will accept. Still, in some scenarios, HMRC may waive VAT penalties based on late payments, normally if there is a serious incident or reason you could not pay – such as a bereavement or hospital stay.

If you would like further information about the changes to VAT fines and penalties, require help to bring your tax affairs up to date, or need assistance with cash flow planning, please contact the SAS Accounting team at any time.

We provide a shortlist of the important deadlines on each of our monthly newsletters, including VAT submission dates, so if you are not receiving our monthly bulletins, please get in touch to be added to our mailing list.