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With Christmas on the way, I’m sure you’re firmly on Santa’s nice list and never submit any late VAT returns. For those unlucky businesses on HMRC’s VAT naughty list, the new year brings some important changes to the VAT penalties scheme.
The current VAT penalties scheme is based on surcharges. A late return or late payment is classed as a default. They are both penalised in the same way.
For a business with less than 150k turnover, one default triggers a warning letter. Two defaults starts the clock on a surcharge period. Every subsequent default within the next 12 months results in a penalty based on the amount of VAT due. For example, the 6th default within a 12 month period results in a surcharge of 15% of the VAT due or £30 (whichever is more).
Businesses with turnover over £150k go straight into the surcharge period on the first default.
If no return has been submitted, HMRC will estimate the VAT due in order to work out the surcharge.
The business needs a clear 12 month period with no defaults in order to reset the clock and leave the surcharge period.
There is no surcharge for a late return if you’ve paid the VAT on time, have a repayment due or there is no VAT to pay.
The new penalties will apply for VAT periods starting 1 Jan 2023. So if your 31 March 23 return is late, it will be the first one with penalties under the new scheme. 31 Jan 23 and 28 Feb 23 returns will still have penalties based on old scheme.
The new scheme splits up the penalties for late submission and late payment and deals with them in different ways.
All VAT returns will be affected, including nil or repayment VAT returns where no VAT is due.
There are no changes in relation to the penalties for inaccurate returns. They will remain the same.
Returns that are submitted late will accrue penalty points. Each late return results in one point.
There are penalty point thresholds which vary depending on whether you submit your VAT returns monthly, quarterly or annually.
If you cross the penalty points threshold there is an initial fine of £200. Any further late submissions result in further fines of £200 for each late return.
The submission penalties apply even if it’s a nil return or a repayment return. This is different to the old scheme where you could submit a late return without penalty, providing there was no VAT due.
Submitting all your return on time for the relevant compliance period will reset your points to zero. For example, if you submit quarterly you need 12 months (so 4 returns), all within the submission deadline to clear your slate with HMRC.
If you’re unable to pay your VAT on time then HMRC is giving you 15 days from the submission and payment deadline to either pay the VAT due or arrange a payment plan with them.
If you’ve not paid the VAT or agreed a payment plan by day 16 then there is an initial late payment penalty. This is calculated as 2% of the VAT due at day 15.
If it’s still overdue at day 31 then there is a further penalty added of 2% of the VAT due at day 30.
After that there is an additional penalty (on top of the previous ones). This is 4% per year for the period that the balance is outstanding, calculated on a daily rate. The total is determined once you pay the VAT.
In addition to the late payment penalties, HMRC will also charge interest on the overdue balance. This will be charged at the Bank of England base rate plus 2.5%, from the day that your VAT is overdue.
So although the late payment penalties don’t apply until day 16, there will still be interest to pay from day 1.
There will still be interest applied, even if you make a payment arrangement to avoid the late payment penalties.
The good news is that HMRC are giving businesses chance to get used to the changes. There will be no first late payment penalty charged until December 2023 providing you pay within 30 days of the payment due date. If you pay later than 30 days there will still be penalties charged.
There is no soft landing planned for the late submission penalties.
The main businesses that could be caught out by these changes are those that submit nil returns or get VAT repayments. You may have got into the habit of not worrying so much about being on time as previously there was no surcharge penalty if there was no VAT due. Under they new scheme there will be penalties and no soft landing period for this part of the changes.
So your new year’s resolution is to make sure that those VAT returns are submitted on time. Remember if you can’t afford the VAT, you can make a payment arrangement with HMRC to avoid late payment penalties.
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