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Don’t get caught out by the new VAT penalty system

Since 1 January 2023, the VAT penalty system has undergone considerable change, as it moves to a new points-based system.

The new rules have altered how penalties are applied, as well as how interest is calculated and paid.

What has changed?  

Businesses are now subject to a replacement of default surcharges with new penalties for late submissions and late payments.

The objective of this shift is to reward businesses that comply with their VAT obligations on a timely basis.

This is being achieved by a more progressive points-based system that focuses on extended periods of compliance. The calculation of VAT interest has also changed as part of this reform.

Who is impacted by this change to VAT penalties?

All businesses submitting VAT returns starting on or after 1 January 2023 are affected by these changes.

These changes may also affect existing tax planning strategies and potential savings from earlier payment dates.

How do the points-based penalties work?

HM Revenue & Customs (HMRC) has outlined its new system for late submission penalties intended to incentivise businesses to comply with their reporting obligations:

Up to 15 days overdue

You will not be charged a penalty if you pay the VAT you owe in full or agree a payment plan on or between days 1 and 15.

Between 16 and 30 days overdue

You will receive a first penalty 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

You will receive a first penalty calculated at 2 per cent on the VAT you owe at day 15 plus 2 per cent on the VAT you owe at day 30.

You will receive a second penalty calculated at a daily rate of 4 per cent per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full, or a payment plan is agreed.

The frequency-dependent thresholds for penalty points mean that more frequent non-compliance results in higher penalties.

However, should a business meet its obligations within the given timeframe, all penalty points are reset back to zero and no further action will be taken against it.

Businesses should also take note of the benefits associated with paying sooner rather than later when it comes to VAT. Paying early means fewer late payment fees, as well as interest due on top of those fees if they are not paid within 30 days of filing a return or making an adjustment request after filing one’s return.

For those who do pay late but still manage to file their returns before the deadline, there are still ways they can reduce their overall financial burden by paying off any outstanding taxes before incurring additional costs in interest charges or late payment fees.

Businesses need to be up to speed and compliant with this new system. Although it effectively gives you longer to improve compliance; once an extended period of non-compliance takes place fines can quickly rise.

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