VAT Penalty Regime Update

The recent Budget included details of the new VAT penalty regime for late submission and payment. It will come into effect for VAT Return periods beginning on or after 1st April 2022. The existing regime is being changed to bring VAT into line with other direct tax returns.

At the moment, late submission or payment of VAT Returns are penalised through a surcharge system. This is calculated as a percentage of the VAT due on the Return. the penalty increases to 2%, 5%, 10%, up to a maximum of 15%, but no account is taken of how late the Return is, and no interest is charged on late payments.

One of the issues with this system is that it can appear harsh if a Return is just a few days lates, but for a large amount. HMRC receive a large number of appeals against the default surcharges that are issued.

The new process will impose up to four different charges on businesses who submit or pay after their due date.

Late Submission Penalty

Late returns will attract a penalty point, and once a threshold for points is reached, the business will receive a £200 penalty for each late Return.

Late Payment Penalty

A two part penalty, the first will be imposed at 2% of outstanding tax if the tax due hasn’t been paid 15 days after its due date. After 30 days, any unpaid tax will attract a 4% penalty.

The second part of the penalty is a daily penalty (set at 4% per year on the outstanding amount) starting 31 days after the due date until the tax is paid.

Late Payment Interest

This will be payable on tax outstanding after the Return’s due date. Calculated at 2.5% above the Bank of England base rate, interest will be charged from the due date until the full amount is received by HMRC.

Our recommendation would be, as always, to ensure that business owners contact HMRC as soon as possible to make a ‘Time to pay’ arrangement if they are struggling to pay any tax liabilities. Under the new VAT penalty regime, this will be helpful, but if those arrangements are not adhered to, the penalties could mount up very quickly.

If you have any questions about the new regime, please get in touch.