The new VAT Penalty and Interest regime
New rules for late submission of VAT returns and late payment took effect on 1 January 2023, but if your business is compliant, as most of our clients are, you will not need to know about this because any odd late submissions and/or payments will attract points but not necessarily any financial penalty. The new regime is more like the one applied to self assessment returns which has;
- Late submission penalties
- Late payment penalties
- Late payment interest
If your business doesn’t submit VAT returns on time or pays its VAT late you will be affected by these new rules for the first VAT return which starts on or after 1 January 2023, which for quarterly returns means either the return period ending 31 March, 30 April or 31 May. Your business is likely to be worse off under the new regime, though some circumstances might see lower penalties. This article is intended as a brief introduction to the changes.
Late submission penalties
Any VAT return submitted late will attract a ‘point’ and if sufficient points are accumulated then a penalty will arise. Points expire after 24 months so a late submission of a single VAT return in a two year period will not accrue enough points to generate a penalty. A business which consistently submits late returns will attract points and for a business submitting quarterly VAT returns the fourth late submission will attract a penalty.
A VAT return has to be submitted roughly 5 weeks after the end of the VAT period and there is no change to this filing deadline, for instance a 31 March return has to be filed by 7 May.
Late payment penalties
Under the new regime there can be no late payment penalty if payment is made within 15 days of the due date for submission. I highly recommend that businesses settle their VAT by direct debit, which gains 3 extra working days after the due date for submission of the VAT return. So if you have a 31 March VAT return and pay by direct debit payment will be taken on 10 May, possibly a day or two later if 10 May falls on a Saturday.
If you cannot pay your VAT in full on time and contact HMRC to make a Time To Pay agreement within 15 days of the due date of payment (submission) there will be no penalty, HRMC are encouraging taxpayers to enter an early dialogue about how they will settle their VAT liabilities.
But if you have not contacted HMRC or paid the VAT in full within 15 days then a flat 2% penalty will be applied. Going another 15 days attracts another flat 2% penalty. Another penalty also applies at 30 days which is 4% ‘simple interest’ which will run until the debt is cleared. Making a Time To Pay agreement at any point will stop these penalties.
Late payment interest
Any late payment of VAT, even within 15 days of the due date for payment (submission) will attract late payment interest. Given that HMRC’s interest rate is base (currently 4.25%) rate +2.5% the rate of 6.75% has more than doubled from a year ago. Interest will also apply to late payment of penalties and will be paid for repayment VAT returns, at base rate less 1%.
Conclusion
The dates for submission of returns and payment of VAT are important for any business and the new regime should be a prompt to improve your position if you are not already compliant. If you are unable to pay VAT on time early dialogue with HMRC will minimise the impact of penalties, but interest will arise.