Are you prepared for new VAT late filing and payment penalties?

HM Revenue & Customs (HMRC) is introducing a new point-based VAT penalty system from 1 January 2023 that replaces the existing late submission penalty regime and is in line with the latest Making Tax Digital requirements.

This new system will see taxpayers accrue a point for each submission deadline that is missed. Once a certain number of points for late submission are incurred, a fine will be issued.

HMRC says that this is a more progressive approach to penalties. However, how many points you will need to accrue before you are penalised will vary depending on how frequently you are required to submit information.

For example:

  • For annual submissions, accruing two points will result in a penalty.
  • In the case of quarterly reports, such as those required under Making Tax Digital, four points will result in a penalty
  • If you are required to make more regular monthly submissions, five penalty points will end in a fine.

A standard fine for each of these submission penalty thresholds is an automatic £200 penalty. However, every single late submission after this initial fine will result in an additional penalty being added.

Although points are accrued over time, they will also expire after two years when a taxpayer demonstrates ongoing compliance with the rules.

The two years are counted from the month after you received the point. However, points will not expire when the penalty threshold is reached.

You won’t face automatic fines for late submissions under this system but the potential for a larger overall fine for extended or regular periods of non-compliance is greater.

What about late VAT payments?

You will not receive a penalty if you pay the VAT you owe in full or agree on a payment plan on or between days one and 15.

If payment continues to be due from day 16 to day 30 you will receive a first penalty calculated at two per cent on the VAT you owe.

Finally, if your VAT payment is 31 days or more overdue, then you will receive a second penalty calculated at a daily rate of four per cent per year for the duration of the outstanding balance.

These penalties are calculated when the outstanding balance is paid in full, or a payment plan is agreed upon.

How to prepare

HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023. However, it will be charging a second penalty for payments that are 31 days late or more.

However, before this new system of penalties is introduced, the online VAT services facility will close on 1 November 2022.

After this date, businesses that fail to file their VAT returns under the Making Tax Digital for VAT rules using compliant software face significant fines and interest.

If you do not comply, HMRC could issue fines of up to £400 for every VAT return and you could receive a penalty of between £5 and £15 each day that digital records are not kept, or digital links are not maintained.

Need help with Making Tax Digital for VAT? Speak to our team today.

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