Reform of VAT late filing and late payment penalties

On 13 January 2022, the government announced a delay to the introduction of revised penalties for late submission of VAT returns (details below).

The new system, which was due to come into effect from 1 April 2022 has now been delayed by nine months until January 2023.

HMRC is changing its penalty regime for late filing and payment of VAT returns with effect from 1 April 2022. The intention is to have a harmonised regime for both VAT and other taxes.

As with MTD, the change will affect VAT before Income Tax Self-Assessment (ITSA). VAT currently has a Default Surcharge regime, which serves as a combined late submission and late payment sanction.

The new system will be more complex than the existing Default Surcharge system, in that there will be separate penalties for late submission and late payment, plus interest. However, the new regime should avoid some of the harshest impact of the old regime, whereby the same penalty is applied whether a payment is one day late or is one year late.

There will be a points-based system. Taxpayers will receive a point every time they miss a submission deadline. A taxpayer filing quarterly VAT returns will receive a financial penalty of £200 if it reaches 4 points and a financial penalty will be charged for every subsequent late submission until the points total is reset.

Where a taxpayer accrues points but does not reach a penalty threshold the points will expire after two years.

After a taxpayer has reached the penalty threshold, all the points accrued within that points total will be reset to zero when the taxpayer has met both the following conditions: -

1. A period of compliance (that is, meeting all submission obligations on time -for quarterly VAT returns this will be 12 months); and
2. The taxpayer has submitted all the submissions which were due within the preceding 24 months. It does not matter whether or not these submissions were initially late.

Note that in the absence of a return, HMRC has the power to estimate a taxpayer’s liability for the period. Significant penalties can arise if a taxpayer simply accepts such an estimated liability that is too low, without notifying HMRC.

There are two late payment penalties that may apply; a first penalty of 2% of any tax that remains unpaid 15 days after the due date; and then an additional or second penalty, again of 2% of any tax that is still unpaid after Day 30. Thereafter penalties accrue on a daily basis, at a rate of 4% per annum on the outstanding amount.

HMRC will charge interest on late payments. HMRC sees this as compensation for the loss of use of the money, not a penalty. A taxpayer that promptly approaches HMRC to agree a Time-To-Pay (TTP) arrangement for paying their outstanding tax may avoid a late payment penalty but will still be charged interest.

On the face of it, the rules are better designed than the Default Surcharge it replaces. They are clearly designed to encourage taxpayers to file and pay VAT on time. It is also clear that HMRC wants to encourage those facing temporary difficulties to engage with them.

It is to be hoped that the operation of the regime in practice is fair and reasonable, and that HMRC do engage with taxpayers needing time to pay.