The default surcharge scheme, which formerly applied to both late submission and late payment of VAT, is replaced by the two different late filing and late payment penalty regimes.
During VAT return periods beginning on or after 1st January 2023, the new late filing and late payment penalties as well as the new interest system apply. Failures pertaining to returns for periods beginning before to 1st January 2023 will be handled in accordance with the previous interest rules and default surcharge regime.
Under the system of late filing penalties, if a taxpayer misses a deadline for filing a VAT return, they will incur a penalty point; if a certain number of points are accumulated, a penalty will be imposed; and the amount of points necessary for a penalty to be assessed depends on how frequently the taxpayer files their VAT reports (two points for annual returns, four points for quarterly returns and five points for monthly returns).
A person is subject to one penalty point if they fail to submit a VAT return by the deadline or earlier. Unless a person has already accrued the required amount of penalty points, they will not be assessed a penalty point for a return.
These following adjustments will be made to a person’s penalty point total if the frequency of their filing responsibilities changes:
| Old return period | New return period | Adjustment |
|---|---|---|
| Annual | Quarterly | Add 2 penalty points |
| Annual | Monthly | Add 3 penalty points |
| Quarterly | Annual | Deduct 2 penalty poin |
| Quarterly | Monthly | Add 1 penalty point |
| Monthly | Annual | Deduct 3 penalty points |
| Monthly | Quarterly | Deduct 1 penalty point |
Penalty Points
Penalty points generally expire 24 months from the first day of the month following the month in which the offense that resulted in the penalty point being awarded.
Taxpayers at the points threshold must meet their return obligations and submit all submissions within 24 months, with annual returns requiring two years, quarterly returns requiring a year, and monthly returns requiring six months of compliance.
Penalties
Late payment penalties consist of two penalty charges: a first on day 15 and day 30, and a second on day 31 until VAT is paid in full. Penalties will stop if the taxpayer agrees a time to pay (TTP) arrangement with HMRC.
No penalty is payable if the VAT due is paid within 15 days, or if the person contacts HMRC with proposals for paying the VAT and a TTP arrangement is made. Late payment fees will be charged on any payments made after the due date.
A first penalty is due if:- the due VAT is not paid in full until 15 days after the due date, and the TTP agreement has not been signed after the proposal to HMRC until 15 days after the due date.
If the due VAT is paid in full, or a TTP is proposed, 15 days after the due date but within 30 days of the due date, the first penalty is 2% of the amount then the balance is due on the 15thday.
If the tax due is not paid in full and the TTP is not provided until 30 days after the due date, the first penalty amount is:
– 2% of the remaining amount due on 15th,
– 2% of the remaining amount due on 30th.
A second penalty will be due if: – VAT is due 31 days after the due date, calculated at a daily rate of 4% per annum, on the remaining VAT amount until fully paid or until the date of receipt of the request for Vat payment. TTP resulted in an agreement with HMRC.
The second penalty is charged when paying VAT.
Acquaintance Period
HMRC says it will take a lighter approach to the initial 2% late payment penalty for taxpayers during the first year of operating the new system. During the first year, when taxpayers do their best to comply, HMRC will not impose the first penalty after the second 15 days, giving taxpayers 30 days to reach HMRC before the penalty is established.
Interests
HMRC charges interest on late payment fees from the date VAT payment is deferred until payment is made in full. If the application is delayed and payment is not made within 30 days, late interest will also be charged. Interest is calculated at the Bank of England base rate plus 2.5%.
HMRC will pay repayment interest (RPI) on any VAT owed by the taxpayer. RPI is calculated from the latest of the following:
• the day after the due date
• the date of presentation,
and until the date of issue of the return. Repayment interest calculated on the basis of the BoE base rate of less than 1% or more than 0.5%.
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