Situations often arise where we are unable to hit payment deadlines, whether human error, or circumstances conspiring unfavourably, it happens. So, it’s good to see HMRC taking a positive stance in this regard, in its latest revision of the VAT penalty system. In this article, we’ll review the changes to the VAT system you can expect in 2023.

VAT changes in 2023As of January 1 the default VAT penalty system has been replaced by a scheme that on the face of it seems to be less punitive for the occasional late payment or submission. The new system treats late submissions and payments separately. It also calculates interest on late payments differently too.

Period of familiarisation

While the new system is already in operation, HMRC has said that it will allow a period of ‘familiarisation’, to allow businesses to adjust. If your business misses a payment deadline, so long as the payment is made within 30 days, or if you have a ‘Time to Pay’ agreement in place, no penalty will be levied. This familiarisation period extends to December 31 2023.

How penalties are applied

The penalty system applies in two ways:

  • Late VAT submissions
  • Late payments

A new development is that late submissions for zero or even repayment returns can incur penalties under the new system.

One of the likely reasons for the new system is to help HMRC reduce the administrative overheads associated with chasing and processing late filings.

A new points system for late submissions

The new points system applies to VAT submission deadlines. It adopts a scheme similar to a driving licence. The more infractions a VAT payer racks up, the more points you get. Each time you miss a submission deadline, 1 point is added. The threshold at which a penalty is applied depends upon the filing submission period. These thresholds are given as:

  • Annual – 2 points
  • Quarterly – 4 points
  • Monthly – 5 points

If you hit your threshold, you’ll incur a penalty of £200. If you continue to miss deadlines, you’ll continue to receive £200 penalties.

You won’t incur a penalty if:

  • Your business is newly VAT registered and is your first VAT return
  • You have cancelled your VAT registration and this is your business’s final VAT return.
  • Single case VAT returns covering periods of a month, quarter or a year.

Can a business clear its accrued penalty points?

Driving licence points usually expire automatically after 4 years, not so with VAT penalty points.

For penalty points under the VAT system to expire, you will have to meet a test of good compliance. The period of time this applies for depends upon your submission period:

  • Annual submissions: 24 months
  • Quarterly submissions: 12 months
  • Monthly submissions: 6 months

More information about the penalty points system can be found on the Government’s VAT site here.

Penalties for late payment

The new system aggressively targets late payers by introducing a two stage system that uses fixed penalties and then daily penalty charges. If your business has not paid its VAT bill and does not have a ‘Time to Pay’ agreement in place, it’s going to get expensive quickly.

Here’s a summary of how it works:

Up to 15 days overdue

The good news is the system does allow for circumstances where you may encounter some unavoidable delays in submission. So, if you have a problem, talk to HMRC as you won’t be charged a penalty if you pay the VAT you owe in full or agree to a payment plan on or between days 1 and 15.

Between 16 and 30 days overdue

If you are late in submission, your first penalty will be calculated at 2 per cent 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.

31 days or more overdue

For circumstances where your submission is 31 or more days late, then your first penalty will be calculated at a rate of 2 per cent on the VAT you owe at day 15 plus 2 percent on the VAT you owe at day 30.

As a further inducement to pay on time, HMRC will levy a second penalty which is calculated at a daily rate of 4 per cent for the duration of the outstanding VAT balance. This is calculated once the outstanding balance is paid in full or a payment plan is agreed.

Don’t forget about interest charges

Receiving a 2% penalty on late payments is only part of the overall costs you’ll incur. HMRC will continue to charge interest on late payments at a rate of 2.5% above the BOE base rate. This is even the case if you have an agreed ‘Time to Pay’ arrangement.

All is not equal under the sun where VAT repayments are concerned though. HMRC will only pay interest at a BOE rate -1% and a minimum rate of 0.5%! It’s probably best to ensure you get your payments correct.

Right to challenge

HMRC VAT right to challenge policy is a policy that allows taxpayers to appeal against HMRC tax decisions. This remains the same under the new scheme in 2023.

It is important for taxpayers to know their rights when it comes to challenging HMRC decisions, as this can help them ensure that they are not paying more than they should be.

Under the policy, taxpayers have the right to request a review of any HMRC decision within 30 days of receiving the decision letter. During this review process, HMRC will consider all relevant information and evidence provided by the taxpayer and make a new decision on the matter. This new decision may result in an increase or decrease in taxes owed, depending on the circumstances.

Taxpayers also have the option of appealing against HMRC decisions in certain cases. This involves submitting an appeal to an independent tribunal which will review all relevant evidence and decide whether or not HMRC’s original decision was correct.

Ultimately, understanding your rights when it comes to challenging HMRC decisions is essential for ensuring you are not paying more than you should be.

How HMRC can use its powers to enforce payment

  • HM Revenue & Customs (HMRC) has a number of powers available to them which they can use to enforce payment and collect any amount outstanding. These include:
  • Taking legal action, including issuing court summonses or seeking orders from magistrates’ courts.
  • Making deductions from a person’s salary or pension payments.
  • Placing a restriction on the bank accounts of individuals or businesses, preventing them from making any further transactions until their debt is paid off.
  • Using third party debt collectors to chase up outstanding payments.
  • Using bailiffs and seizing goods in order to cover the cost of unpaid VAT.

In extreme cases, HMRC may even take criminal action against someone who has deliberately evaded payment of their taxes, leading to potential fines and/or imprisonment. Therefore, it is important for businesses to ensure they remain compliant with all applicable legislation surrounding their VAT payments and make sure that all amounts due are paid on time in order to avoid any of these serious consequences.

Why it makes sense allowing a VAT professional manage your VAT submissions

VAT for all but the smallest VAT registered companies can be a complex affair where mistakes can easily be made. TaxAgility are experts in VAT and can remove the burdens of managing and calculating your VAT liabilities from your daily business management routine. We’ll ensure your VAT returns are accurate and make sure they are filed on time.

If you’d like to simplify your VAT management, call TaxAgility today on 020 8108 0090.