A new way of setting penalties for late submission of VAT returns and payment of VAT has been announced by HMRC. The changes will apply to VAT payers for accounting periods beginning on or after April 1, 2022, to income tax self assessment customers (ITSA) with business or property income over £10,000 per year (who are required to submit digital quarterly updates through Making Tax Digital for ITSA) for accounting periods beginning on or after April 6, 2023, and to all other ITSA taxpayers for accounting periods beginning on or after April 6, 2024.In this article, you'll read a summary of the draft legislation and explanatory note for the new Late submission Penalties, Late Payment Penalties and Late Payment Interest for VAT.
Late payment penalty (LPP)
The new Late Payment Penalties will apply to payments due from VAT businesses, for VAT it will replace the Default Surcharge, which served as a combined late submission and late payment sanction. There are two late payment penalties that may apply; a first penalty and then an additional or second penalty, with an annualized penalty rate.
The taxpayer will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. If tax remains unpaid after the 15 days, the taxpayer incurs the first penalty. This penalty is set at 2% of the tax outstanding after day 15. If any of this tax is still unpaid after day 30, the penalty increases to 4% of the tax outstanding after Day 30.
If tax remains unpaid on Day 31, the taxpayer will begin to incur an additional penalty on the tax that remains outstanding. It accrues on a daily basis, at a rate of 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the due VAT.
HMRC will offer taxpayers the option of requesting a Time-To-Pay (TTP) arrangement. This enables a taxpayer to stop a penalty from accruing any further by approaching HMRC and agreeing a schedule for paying their outstanding tax. A TTP arrangement, if agreed, has the same effect of paying the tax and stops penalties accruing from the day the taxpayer approaches HMRC to agree it (provided that the taxpayer continues to honor the terms of the TTP agreement).
HMRC has discretionary power to reduce or not to charge a penalty for late payment if it considers that appropriate in the circumstances. This will include where there are special circumstances that cause a taxpayer to pay their tax late.
HMRC recognizes that moving to the new system of late payment penalties is a significant change for some customers, especially those who might have more difficulty in getting in contact with HMRC within 15 days of missing a payment to begin arranging a Time-to-Pay agreement. HMRC will therefore take a light-touch approach to the initial 2% late payment penalty for customers in the first year of operation of the new system under both VAT and ITSA. Where a taxpayer is doing their best to comply, HMRC will not assess the first penalty at 2% after 15 days, allowing taxpayers 30 days to approach HMRC in the first year before HMRC charges a penalty. The first penalty charged will be charged at 4% on any tax still outstanding at 30 days.
Additionally, there is no penalty due if the taxpayer has a reasonable excuse for late payment. If HMRC is satisfied a taxpayer has a reasonable excuse HMRC will agree not to assess. This will prevent the taxpayer from unnecessarily having to appeal.
Late payment interest (LPI)
HMRC will charge LPI on tax that is outstanding after the due date, irrespective of whether any LPP has also been charged. The LPI will apply from the date the payment was due until the date on which it is received by HMRC. LPI will be calculated as simple interest at a rate of 2.5% + the Bank of England base rate.
Where a taxpayer has overpaid tax, HMRC will pay Repayment Interest (RPI) on any tax due to be repaid (the difference between the amount due and the amount paid) either from the last day the payment was due to be received or the day it was received, whichever is later, until the date of repayment. RPI will be paid at the Bank of England base rate less 1% (with a minimum rate of 0.5%). LPI will continue to accrue on amounts not paid on time even if those amounts are included in a Time-to-Pay arrangement.
Late submission Penalties
When a taxpayer misses a VAT submission deadline they will incur a point. A fixed financial penalty of £200 will only be imposed after the taxpayer has reached the points threshold. The level of points threshold depends on the taxpayer’s submission frequency: Annually = 2 points / Quarterly = 4 Points / Monthly = 5 Points.
Individual penalty points accrued will automatically expire after 24 months provided the taxpayer remains below the points threshold. After the points threshold has been reached all points will expire after the taxpayer has met their return obligations for a set period of time based on their submission frequency: Annually = 24 months / Quarterly = 12 months / Monthly = 6 months.
If the taxpayer continues to miss submission deadlines after they have reached the points threshold and have been issued with a penalty, they will become liable for a further fixed rate penalty for each additional missed obligation. This is the case even if they have paid the fixed rate penalty. A taxpayer will not be liable to a point or penalty if they had a reasonable excuse for not making the relevant submission on time and will have a right to appeal against both points and penalties.
Don't miss any important VAT and other trade compliance related news updates! Subscribe to our newsletter and receive the latest updates directly in your mailbox.
Daniëlle van der Meulen-Idema
Sr. VAT Specialist