The new VAT system will be fairer but more complex

HMRC’s new penalty regime for late submission and late payments of VAT will be fairer but more complex, with interest charged on all late payments.

Alan Pearce, VAT Partner at Blick Rothenberg, said: “HMRC is introducing a new regime of penalties for late filing and late VAT payments for returns beginning on or after 1 January 2023. That all companies that are registered for VAT must be taken into account.

The new regime will be fairer for companies by penalizing those who persistently file and pay late, rather than those who slip up. It will replace the current non-compliance fee regime that has been widely criticized for imposing significant fines when payment is just one day late. Unlike the current regime, however, there will be a more complex multi-tiered penalty system with interest also charged on all late payments.”

The new regime will effectively have four different types of charges; a fixed amount of late-show fine based on a point system (similar in concept to total points for traffic violations); an initial two-part flat-rate penalty for late payments of 2% and 4% (applicable to the first 15 and 30 days); an ongoing penalty based on 4% daily interest (applied after 30 days) and interest charged at 2.5% above the Bank of England base rate (applied from the start).

“The new penalty regime is more complicated than the current late payment regime. However, it seems to be fairer to those companies that can occasionally pay late, and rewards those that do their best to pay their outstanding taxes as soon as possible. Under current rules, businesses are often hit with large surcharges of between 2% and 15% simply for being a day late. Often this can be due to a single clerical error or bank delay.

Therefore, the change should be welcomed and should avoid the need for many late payment appeals when the amount of the penalty is disproportionate to the amount and timing of the late payment. Alan said: “For many defaulters, the new rules will result in a relatively small penalty and interest payments.

However, for companies that persistently do not file their VAT returns on time and are often more than 30 days late in payment, they will suffer the highest level of penalties and interest. It seems HMRC has struck a balance by penalizing serial offenders more while incentivizing compliance and being more lenient to those who make the occasional mistake.”

“In addition, HMRC has announced that it will apply a ‘light touch’ for the first year of operation. Specifically, where a business is doing its best to comply, HMRC will waive the first flat 2% penalty for VAT periods up to the end of 2023. This means that as long as payments are received within 30 days of the due date (or, during this period, an approach has been made to HMRC for a while to pay for the application) penalties can be avoided. However, even when an agreement is reached with HMRC, interest will still apply.”

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