New VAT rules for penalty and interest.
For VAT accounting periods starting on or after 1 January 2023, it’s out with the old – the default surcharge regime; and in with the new – a penalty system designed to be fairer and more proportionate. Under the new rules, new penalties apply for late submission of VAT returns and late payment. There are also changes to how VAT interest is calculated.
The impact of some of the rules may come as something of a surprise. Any late submission brings exposure to late submission penalty points, and even financial penalties. This applies across the board, even where submitting a nil or repayment return.
The new late submission penalties use a points-based system, each late return triggering a penalty point. These points automatically expire after 24 months unless a penalty threshold is reached in that time. The penalty threshold varies, depending on whether returns are filed annually, quarterly or monthly returns: it is four points for quarterly returns. On hitting the penalty threshold, a £200 penalty accrues, with further £200 penalties charged for each subsequent late submission. If there has been a penalty, points are reset to nil by showing compliant behaviour for a period set by HMRC (dependent on the filing frequency). This route involves submitting all returns on or before the due date, and ensuring all outstanding returns for the previous 24 months are filed.
For the new late payment penalty system, the sooner VAT is paid, the lower the penalty range. Penalties escalate on a sliding scale:
- payment in full, or agreeing a payment plan on or between days 1 and 15: no penalty (though interest is charged)
- payment in full or arranging a payment plan on or between days 16 and 30: first penalty calculated at 2% of the VAT owing at day 15
- 31 days or more overdue: first penalty calculated at 2% of the VAT owing at day 15, plus 2% of the VAT owed at day 30. Second penalty, calculated at a daily rate of 4% per year for the remaining duration of the outstanding balance (calculated when outstanding balance is paid in full or payment plan agreed).
HMRC is giving a ‘period of familiarisation’ from 1 January 2023 to 31 December 2023, in which a first late payment penalty will not be charged if payment is made in full within 30 days of the due date.
Mistake on a VAT return? What to do next
The basic divide is between errors that need to be reported to HMRC in their own right, and errors that can simply be corrected by making adjustments to the next VAT return. Time is always of the essence with VAT. Put right anything that’s amiss as soon as it comes to light in order to keep out of the penalty regime.
For errors that need to be reported, HMRC has a new online VAT Error Correction Notice (VAT652) online form. It doesn’t replace the print and post form, which is still available. The online form, however, is now HMRC’s preferred route.
It can be used by signing in through Government Gateway or email address. If using the email option, a security code is sent to the email address given. Having signed in, details of the error can be provided, and HMRC will acknowledge receipt with a notification and unique reference number. New features include the ability to upload supporting documents, such as calculations or explanatory letters, and the ability to save and complete the form later.
But not every error needs to be notified in this way. Non-deliberate errors can be corrected on the next VAT return if either:
- net errors don’t exceed £10,000 or
- are between £10,000 and £50,000 but don’t exceed 1% of the figure in box 6 (net outputs) on the VAT return on which the error is being corrected.
Be aware though, that for penalty mitigation purposes, a correction on the VAT return is not sufficient disclosure. This means that there may also still be a need to inform HMRC separately of the error.