A new penalty regime has been introduced by HMRC, as of January 2023, creating a much fairer default surcharge system. 

 

From 1st January 2023, the longstanding surcharge regime was replaced by a new system to penalise late payment of VAT returns, meaning only the small minority who persistently miss their submission obligations rather than those who make occasional mistakes.

 

So, those taxpayers that are, say, one day late with their payment because of an oversight in their diary or confusion with their online banking arrangements, will no longer have to suffer with penalties – it will only penalise persistent late-payers.

 

The new system will increase the penalty, and also introduce an interest charge, according to how long the payment is outstanding. 

 

  • A VAT registered business will be charged a 2% penalty for VAT not paid by the end of day 15 after the due date. 
  • There will be a further 2% penalty for tax still unpaid by the end of day 30. 
  • An annual penalty rate of 4% will apply thereafter until the tax is finally paid. 

 

This basically means every VAT registered business will have a clear incentive to pay its VAT bill as soon as possible! 

 

The finer details

 

If a business pays its VAT late, it will be charged interest from day one. 

The interest will be 2.5% above the Bank of England’s base rate. Interest is not a penalty.

 

There will be no penalty charged if VAT has been paid by the end of day 15 after the due payment day. 

 

If any tax is still owed by close of play on day 30, a further 2% penalty will be charged on this outstanding balance. 

 

From day 31, an annualised penalty rate of 4% will apply until the outstanding tax is paid.

 

A penalty is only charged on tax owed on the penalty trigger dates, so there is an incentive to make part payments. 

 

The new system will apply from periods beginning on or after 1st January 2023.

 

The best option is to make sure that any VAT registered entity pays all tax owed by the due date. 

 

Here are some tips to reduce or avoid a late payment penalty

 

  • Direct Debit: Pay all VAT returns by direct debit, so that HMRC will automatically collect the payment three working days after the due date. 

 

  • Time-to-pay agreements: No penalty will be applied once a time-to-pay agreement has been accepted by HMRC. So, for example, if an agreement is reached on day 20 after the due payment date, this will avoid a penalty being charged in the first year due to HMRC’s temporary 30 day concession explained in the article. However, interest will still be charged from the due payment date. 

 

  • Submit returns on time: Make sure that you submit your returns on time, even if the tax owed cannot be paid by the due date. 

 

  • Make part-payments: Penalties are charged according to tax owed at the end of days 15 and 30. This five a clear incentive to pay as much tax on time as possible, and part-payments thereafter to reduce the scope for HMRC to issue late notices and charge interest. 

You can continue reading about the changes on the Tax Advisor website, but also if you have any other questions, contact us!

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