January 2023 VAT layman’s changes guide

Your guide below

HMRC have just announced that in January 2023 they are bringing in a new penalty and interest regime for late filing of VAT returns and the late payment of any VAT due. This will result in some significant changes, including the prospect of penalties applying to both repayment traders and nil returns, for the first time.

Jan 2023 VAT Changes: What is changing and when?

The new penalties will replace the existing default surcharge rules for VAT periods starting on or after 1st January 2023. As a result, the first taxpayers to enter the new regime will be those in stagger group 1 (businesses who whose VAT Quarters end on the last day of March, June, September and December) plus anyone required to submit a monthly VAT return.

The new penalty regime will be points based, with each failure to submit a return on time resulting in the taxpayer receiving one penalty point from HMRC. Once the total number of penalty points reaches a certain threshold, a fixed financial penalty of £200 will be charged; so, for example, if you submit two Annual Returns late, you will have received 2 penalty points and the late submission penalty points threshold will have been breached and you will receive a £200 penalty.

The late submission penalty points threshold will vary dependant upon how often you submit a return:

It is also planned to extend the new penalty regime to self-assessment tax returns when Making Tax Digital comes in in April 2024, although HMRC haven’t yet said what points will be applied and what the penalty thresholds will be for Income Tax

Jan 2023 VAT Changes: The impact on taxpayers

A lot of businesses will be glad to see the back of the default surcharge regime, and the disproportionate penalties it can impose. Taxpayers will start with a clean slate under the new penalty points regime, regardless of their current position – there is no mapping over from the default surcharge regime to the new points-based one, which is a relief.

For the first time, however, late filing penalties will apply for returns when no VAT is due. This is likely to come as a surprise to repayment traders, who have not previously had to worry about late filing penalties.

Jan 2023 VAT Changes: When will be able to reset your points back to zero?

Once a taxpayer has reached the penalty threshold, the only way their points can be removed is through a period of compliance. You will be able to reset your points back to zero when both of the following two conditions are met:

• Submit your returns on or before the due date for your period of compliance — this will be based on your submission frequency, and…
• Ensure that all outstanding returns due for the previous 24 months have been received by HMRC.

For example, a taxpayer who has failed to submit four quarterly returns on time and accumulated four penalty points will receive a £200 penalty. In order for their points to be reset to zero, they will need to get to the point where both: their next four quarterly VAT returns have all been submitted on time; and also that all VAT returns for the previous 24 months have been submitted.

Jan 2023 VAT Changes: How will the new late-payment penalties work?

Under the new regime, there are two separate late-payment penalties. The first penalty has two separate legs: 2% of the VAT unpaid at day 15 A further 2% of the VAT unpaid at day 30. This means that, if no payment is made until after day 30, the first penalty will be 4% of the amount due. However, if full payment is made between days 15 and 30, the first penalty will remain at 2%.

The second penalty only kicks in from day 31 and is a daily charge, based on an annual rate of 4% of any outstanding amount. The biggest change under the new regime is that, provided all outstanding VAT is paid within 15 days of the due date (or a Time to Pay arrangement is requested within that same period), no late-payment penalty will arise. There will however still be late-payment interest (see below).

Jan 2023 VAT Changes: Changes to the rate of interest charged

W.e.f. 1st January 2023, late-payment interest will be charged from the day a VAT payment becomes overdue until the date it is paid in full. The rate applied will be the Bank of England base rate plus 2.5%. Also, the repayment supplement will be replaced by repayment interest,

The interest will accrue from the day after the due date or submission date (whichever is later) until HMRC makes the full repayment. This rate for repayment interest will be much lower than that for late-payment interest, being set at the Bank of England base rate minus 1% (subject to a minimum rate of 0.5%).

Jan 2023 VAT Changes: Will there be a soft landing for the new penalty regime?

No there won’t, but if you are genuinely struggling to file on time, the usual provisions around reasonable excuse for late filing will apply to both penalty points and financial penalties. Taxpayers and/or their accountants will be able to request a review by HMRC, or submit an appeal to the tribunal, in respect of points and/or penalties. HMRC is building an online system that should make this process more efficient.

Tax Accountant’s view

I’ve been aware of these changes for some time, but it is only now that HMRC have put some flesh on the ones of their earlier announcements. Personally, I don’t have a major issue with most of the new rules as, if you are late with four quarterly VAT returns in a row, you can’t complain about a £200 slap on the wrist.

What I do have an issue with is the interest payable when HMRC owes you money. Whilst I accept that the current repayment supplement is quite generous, to have one rate for taxpayers and a much lower one when HMRC owes your money, is quite frankly appalling and reveals HMRC, it its true colours.