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Since VAT was introduced as the UK’s sales tax back in 1973, the penalty regime used to enforce compliance has been markedly different from that of Income Tax.
Back in the day, VAT was administered by what was then Customs & Excise whilst Income Tax and the other direct taxes fell under the care and management of the Board of Inland Revenue. The coming together of these two agencies to form HM Revenue & Customs in 2005 did nothing to bring a consistent approach to compliance with VAT and Income Tax obligations until now.
HMRC has a stated objective to change the existing regime and roll out a combined penalty regime which is ‘simple, fair and effective to protect public finances by incentivising compliance and to strengthen confidence in the tax system’ They explained that a combined approach would be consistent and penalise the small minority who, it claimed, did not take their tax compliance seriously. Those individuals and businesses who persistently missed filing and payment deadlines will face more rigorous penalties compared with those who make the occasional accidental error.
HMRC applied updated penalty rules for VAT from periods beginning 1st January 2023 and for income tax from a later date. Therefore, in this article we look at the current position from a VAT perspective.
A new points-based penalty replaced previous penalties (known as the Default Surcharge for VAT. When a taxpayer misses a submission deadline, they will incur a penalty point. Once a penalty threshold has been reached, a fixed penalty of £200 will be issued for every missed submission until a period of compliance (where all returns are submitted on time) allows the accumulated points tally to be reset to zero.
For annual submissions (VAT Annual Accounting) the threshold is 2 points and requires a 24 month period of compliance for the points to reset.
For Quarterly submissions (most VAT returns) the threshold is 4 points and requires a 12 month period of compliance for the points to reset.
For Monthly submissions (monthly VAT returns) the threshold is 5 points and requires a 6 month period of compliance to reset.
For the points to be reset to zero, as well as the necessary period of compliance that follows the last missed submission, all returns within the previous 24 months must be filed and up to date. In common with the old regime, there remains a right of appeal against the penalty on the grounds of ‘reasonable excuse’ – a limited list of reasons outlined in legislation.
Previous late payment sanctions were replaced. The new late payment penalty consists of 2 charges:
No penalty is chargeable on tax paid up to 15 days after the due date.
A 2% penalty is chargeable on tax paid between 16 – 30 days after the due date.
4% on chargeable tax unpaid after 30 days.
A further 4% annual penalty rate will be chargeable on outstanding tax due after 30 days.
HMRC have confirmed penalties will stop accruing where a time to pay agreement is reached. Again, no penalty is payable if the taxpayer has a reasonable excuse and HMRC has discretionary powers to reduce or waive penalties in appropriate circumstances.
Interest will accrue on any late payment from the tax due date until the date payment is received. VAT repayment supplement is replaced with Repayment Interest. This is paid from the later of either the due date of the Return, or the date the Return is submitted.
The drive towards Making Tax Digital appears to be the main focus for HMRC and the points based penalty system is likely to be adopted across other taxes in future too. If you have any questions regarding VAT or would like further information or advice, then we would recommend that you speak to your limited company accountant.
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