From the 1st January 2023 the VAT penalty system is changing to a points based system. There are two trigger points for this:
- Late filing of a VAT return, and
- Late payment of the VAT liability
As most traders use quarterly filing then we will cover this.
Late filing of the VAT return
To get the first penalty you would have needed to be late with your VAT return four times. On the fifth occasion you will incur a £200 penalty and every late return after that another £200. To reset the clock you will need 12 consecutive months (4 VAT quarters) of being on time.
Late payment of VAT liability
The late payment penalty is probably best described with an example. If your VAT quarter is 31st March then payment would fall due by 7th May. However, HMRC will allow you another 15 days (that is to the 22nd May) before you incur a tax geared liability of 2% of your VAT liability. If your payment is late by 30 days from the 7th May then the penalty increases to 4% of your VAT liability.
For the first year of the new system there will be a 12 month concession where if all the tax is paid then no penalty will be incurred.
Interest
This has not changed as it is restitution to the Exchequer. In the above example interest will start to accrual from the 7th May at 2.5% above the Bank of England base rate.
How can you avoid these penalties?
As the cost of living is increasing you may find yourself unable to pay all the VAT in one go. Our advice is to file the VAT return even if payment can’t be made on time. You must then telephone HMRC before the 22nd of the month the payment falls due and agree a time-to-pay arrangement. This will avoid the tax geared penalty, however, interest will still accrue from the 7th May in this example until the liability is cleared.
If you need help preparing your VAT returns or VAT advice then please get in touch with us.
