Farmers should prepare for new VAT penalties for late filing/payment of VAT returns

As of today (Autumn 2022), the existing “Default Surcharge” system is focused on penalising late payments of VAT. So, if a farmer is due a repayment of VAT no surcharge arises if the VAT return claim is submitted late.

From 1 January 2023, the current penalty system is undergoing a significant reform. In many ways, the new system for penalising late payments of VAT will be fairer, but in addition to penalties (and interest) being levied for late payment of VAT due, penalties may accrue for not filing the return on time.

The key change is that the sooner a business pays the VAT due, the lower the penalty rate will be. This contrasts with the Default Surcharge System where the penalty was the same whether payment was one day or one year late. Under the new system, when fully implemented: -

• You will not be charged a penalty if you pay the VAT you owe in full or agree a payment plan on or between days 1 and 15.
• You will receive a first penalty calculated at 2% on the VAT you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.
• You will receive a first penalty calculated at 2% on the VAT you owe at day 15 plus 2% on the VAT you owe at day 30 if you have not paid in full or agreed a payment plan by day 30.
• You will receive a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full, or a payment plan is agreed.

Whereas the existing system allowed at least one “default” before penalties were levied, the new arrangement does not. But as a concession, HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if payment is made in full within 30 days of the payment due date.

In addition to the late payment penalty, HMRC will charge interest at the Bank of England base rate plus 2.5%. A formal time-to-pay agreement reached with HMRC will prevent penalties being charged but not interest.

A points-based system will apply to VAT returns starting on or after 1 January 2023. A business will receive a point for every late VAT return. If its points exceed a threshold, it will receive a £200 penalty and a further £200 penalty for each subsequent late submission.

Businesses submitting monthly returns will reach the threshold at five late returns, for businesses on quarterly returns, this will be four.

If enough subsequent returns are submitted on time, the points are reset to zero. For quarterly returns, “this period of compliance” is 12 months, for monthly returns, 6 months.

Among other considerations, the new late filing penalty may affect the desirability of monthly (rather than quarterly or even annual) VAT returns, particularly for those whose average claim is below the potential late filing penalty of £200.