New VAT penalty rules for every business

If you’re VAT registered, you’re probably already heard (or your tax adviser will certainly be aware) about the VAT changes that have come into effect this month.  

However, if your attention has focussed on preparing your assessment tax return for the 31st January deadline, or you’re considering registering for VAT but haven’t yet made the move, read on as you may be pleasantly surprised!

Penalty points system introduced from 1st January 2023

From January 1st, HMRC is applying a new regimen to penalise businesses that do not submit their VAT returns and/or do not pay their VAT liabilities on time.

This announcement was originally going to be introduced in April 2022 but was deferred until the start of 2023.

The changes see the introduction of a points-based penalty system that is intended to penalise repeat offences whilst giving the benefit of the doubt for occasional lapses.

We’ll try to make this explanation as clear as possible, but the devil is in the detail as is often the case.

Late submissions = points

Late filing of a tax return will incur a £200 maximum fine.

However, you may or may not pay the full fine depending on your record and this is where the points system comes in:

Under the new scheme, every registered business will have a points allowance which is determined by the number of VAT submissions it is required to make during each tax year. 

One penalty point will be given for every missed submission deadline.

When and if you reach your points threshold, you may incur a late filing £200 maximum fine. If you don’t miss another deadline within a specified period (determined by the frequency of your submissions) your points tally will be reset to zero.

So, you’ll get several opportunities to get it right before you get a penalty fine, but once you’ve reached your penalty threshold, you’ll keep on getting fines for every misdemeanour until you’ve cleared your active penalty period (as is the system for points for driving offences).

Late payments = points

No penalty will be issued if you’ve submitted your return and have paid the VAT due within 15 days. However, a surcharge will be added to the amount outstanding if you’re late paying:

Time to pay up

There’s further leeway if you contact the authorities to set up a payment schedule to clear the outstanding amount. Under these arrangements, you will not incur additional charges provided you stick to your payment schedule.

Fair challenge

You can challenge any penalty points or fees incurred through an appeal process. HMRC will look at the reasons the submission or payment deadlines were missed (remember, you get more than one chance to meet the deadlines before you reach your penalty threshold).

HMRC appeal

The first stage of appeal is via an internal HMRC review. If the matter is still not resolved, it will be referred for a first-tier tax tribunal.

The new system will take a little while to bed down, but overall, it seems fair to all concerned. HMRC is giving fair warning by removing the universal fine as was previously applied and the new system takes business circumstances into account.

The focus of the scheme is to acknowledge business circumstances that may force an occasional or one-off lapse, whilst sending a clear message and not inconsequential punishment to repeat offenders.

We’re here to help!

Rackhams is here to answer your VAT questions and to help with your VAT returns. If you’re in business and not currently obligated, we can also advise you whether it would be to your advantage to register voluntarily for VAT. Call us on 01482 631700 for a free, no-nonsense chat about VAT.

You’ll also find a full explanation of every aspect of VAT on the HMRC website:

https://www.gov.uk/browse/tax/vat

MONEYtalk

Information correct at time of publication.