Changes to VAT penalties and VAT Interest charges

Date posted: 25th May 2022

Changes to VAT penalties and VAT interest charges which were due to be introduced for VAT return periods beginning on or after 1 April 2022 have been postponed until 1 January 2023.

Currently a Default Surcharge applies which combines both a late submission and a late payment surcharge. After the first late return, a Surcharge Liability Notice (SLN) is issued which lasts for 12 months. If further defaults occur, the SLN period is extended and penalties of up to 15% of the tax due are incurred depending on the number of defaults.

The proposed changes will see a two-tier penalty system, a late submission penalty and a two-part system for late payments.

Where a VAT return is submitted late HMRC will issue a single penalty point. Once a points threshold is exceeded for multiple missed returns a flat penalty of £200 will be imposed for each late return.  The threshold depends on whether the returns are submitted annually (2 points), quarterly (4 points) or monthly (5 points). The changes are designed to penalise those who frequently file late returns rather than those who make the occasional late submission. Points can be reset to zero by submitting all returns on time for a set period of 24 months for annual filers, 12 months for quarterly filers and 6 months for monthly filers and have also filed all outstanding returns to HMRC for the previous 24 months.

In terms of late payment penalties, the sooner the VAT is paid the lower the penalty rate that will be charged. The first penalty will be 2% of the outstanding tax if the VAT due remains outstanding 15 days after its due date. The penalty increases to 4% on any VAT still unpaid after 30 days. The second penalty is a daily charge of 4% per annum on the outstanding amount starting 31 days after the due date until the outstanding tax is paid.

If a ‘time to pay’ arrangement is agreed the penalty will stop accruing from the date the proposal is submitted by the taxpayer to HMRC so it is advisable to arrange an agreement as soon as you know that you are unable to pay the VAT due. HMRC will not charge a late payment penalty in the first year from 1 January 2023 until 31 December 2023 if the tax is paid in full within 30 days of the payment due date.

If you need any advice regarding changes to VAT penalties, then contact the team here. 

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