VAT returns beginning on or after 1 January 2023 will be subject to a new penalty system. It is intended to penalize persistent offenders rather than those who occasionally make mistakes or do not return their tax returns on time. Payments made late will be handled differently than submissions made late. This can be particuarly worrying for ecommerce businesses who are regularly late with their payments or returns.

There will be a points system for late returns. Late returns earn one penalty point. Upon reaching a points threshold, a £200 penalty is imposed, and it varies based on return frequency as follows:

• A 5 point penalty is applied to monthly returns
• There are 4 points deducted for quarterly returns
• 2 points are deducted for annual returns

Any subsequent returns after reaching the points threshold are penalized with £200.

The penalty for late repayment returns is a significant change from the current system. A penalty was based on a percentage of the VAT payable to HMRC under the current system. There is no current penalty where this is nil.

It is often argued that the current late payment penalty system is unfair since the same penalty can be applied to one day late payment as to one year late payment.

Penalties

In the new system, no penalties will be assessed for payments made within 15 days of the due date (or for payments made under a payment plan).

Payments made between 16 and 30 days will be penalized by 2%. Payments made after 30 days are subject to a further 2% penalty.

The annual rate increases after 30 days to 4%.

As long as taxes are fully paid by day 30, there will be no penalty in the first year of the concession until 31 December 2023.

However, if tax is paid late, a separate interest charge is imposed and the clock starts immediately. The interest rate is based on the Bank of England base rate plus 2.5%. Consequently, even if a business consistently pays its VAT bill late by 14 days without incurring a penalty, interest will still accrue.

Currently, HMRC pays a 5% repayment supplement if a repayment is late by more than 30 days. In the future, this will not be the case. In no way does this compensate businesses forced to borrow additional funds to cover the shortfall while waiting for repayment. However, interest will be paid at Bank of England base rate minus 1%, subject to a minimum of 0.5%.

Reset the threshold

A return to zero points requires the following two conditions:

Firstly, you must submit your returns for the last 24 months; and secondly,
In addition, quarterly returns must be filed no later than 12 months following the return that breached the threshold (annual returns must be filed no later than 24 months, and monthly returns must be filed no later than 6 months).

Due to the current penalty regime, infrequent late returns and payments were potentially subject to heavy penalties, resulting in a large number of appeals and tribunal cases. It is difficult to prove you have a reasonable excuse when you are late, tribunal cases, if not appeals, are likely to decline. If you are persistently late, you could incur a penalty that makes it worthwhile to go to court.

Is there a way to minimize penalties?

It is possible to reduce the risk of penalties in a number of ways. Using direct debit is a sure way of ensuring you do not miss payments. Clients who do not use this method are constantly reminded of it. It is the best way to ensure payments are made on time if there are enough funds in your bank account.

Ecommerce businesses reguarly borrow money to fuel growth, so keeping an eye on your VAT liability is key.

If you cannot make payments on time, you can reduce penalties by agreeing to a time-to-pay arrangement. By filing the return on time, even if you can’t pay on time, you will minimise penalties. Finally, penalties are calculated on unpaid tax so if you can’t pay in full, it’s best to part pay.

Contact us

If you want to make sure you are never late with a VAT return again, please contact us and we can discuss how we can help you.