What do points make? Prizes Penalties!

This rather dispiriting take on Brucie’s classic catchphrase came to mind having read about HMRC’s recent revamp of how penalties and interest apply to a late VAT payment.

However, the points-based element of the new penalty regime shouldn’t be the main headline. Racking up points on HMRC’s naughty step for repeatedly submitting late VAT returns? This only results in a low-value fixed penalty of £200 per default.  

However, this means that a penalty can now be levied. This is whether or not VAT is due on late returns, including repayment returns.

The real pain, however, is not when VAT declarations are late but when VAT payments are late. The new late payment penalties not only apply to VAT return payments but also the payment of VAT assessments.

That said, the new rules at least consider how late the payments are. This is more than they say for the old default surcharge system. Which saw the same penalty applied whether the payment was one day or one month late.

And under the new rules, which will apply to all VAT returns beginning on or after 1 January 2023, there will now be no late payment penalties if you pay in the 14-day period following the date payment was due.

However, they introduce three new penalties under the new rules.

Penalty One applies on payments that are still outstanding 15 days after the payment became due. Penalties Two and Three applying to payments that are 30 days or more late.  

Penalties One and Two are similar and apply as follows:

• Penalty One – a penalty equal to 2% of the outstanding balance on day 15 will be applied where a VAT payment is 15 days or more late, and
• Penalty Two – a further penalty equal to 2% of the outstanding balance on day 30 will be applied where a VAT payment is 30 days or more late

You don’t get anything for a pair…not in this game!

Not content with issuing two penalties if a VAT payment is more than 30 days late, Penalty Three applies from day 31. And, every day after that until you make full payment, calculated daily on the outstanding balance at a rate of 4% per annum.

Interesting….very interesting!

I know this is from Barry Davies, not Brucie, but I’m having to use artistic licence now!

Not satisfied with three (four if you include the £200 late declaration penalties) potentially being applicable, HMRC will also charge daily interest on all outstanding amounts. The rate is 2.5% above the Bank of England base rate. 

There is no ‘grace period’ for the interest charge. It will be charged as soon as payment is late, and the rate charged becomes even more eyewatering when you consider that the interest rate that HMRC will pay out to taxpayers (on the rare occasion that they admit they’re in the wrong) is set at 0.5% below the Bank of England base rate (so a full 3% less than the amount of interest they charge).

Nice to see you, to see you nice. It could still be a good night if you play your cards right

There is a positive aspect of the new VAT penalty regime. The new penalties are designed to encourage taxpayers to seek help from HMRC if they envisage difficulties paying their VAT.  

HMRC announced that penalties will be suspended if taxpayers apply for a Time To Pay agreement before they become due. If the Time To Pay terms are not honoured, the penalties will be de-suspended.

Therefore, if you don’t think you will be able to pay your VAT on time, don’t hesitate to speak to HMRC. Or get your adviser to talk to HMRC on your behalf. 

You may be able to agree a payment plan and minimise the impact of the new penalty rules if you engage with HMRC. The sooner, the better, or at the very latest, no more than 14 days after the payment becomes due.

Next Steps

Speak to your regular ETC Tax contact for more information.