Stuart Hulland, Partner at Bates Weston, has been looking at HMRC’s decision to delay the reform of the VAT penalty system until January 2023.

HMRC proposed reforming penalties for late payment and interest and late submission of returns last year. The aim of the reform was to bring VAT interest charges and repayment interest in line with other tax regimes, including Income Tax Self-Assessment (ITSA).

HMRC has now decided to delay its proposed reforms as follows:

  • for VAT taxpayers from periods starting on or after 1 January 2023
  • for taxpayers in Income Tax Self-Assessment (ITSA), from the tax year beginning 6 April 2024 for taxpayers with business or property income over £10,000 per year (that is, taxpayers who are required to submit digital quarterly updates through Making Tax Digital for ITSA)
  • for all other ITSA taxpayers, from the tax year beginning 6 April 2025

Here is a reminder of the changes to come:

Late Payment Penalties

There are two late payment penalties that may apply; the first 2% penalty is incurred if outstanding tax is not paid within 15 days of the due date. If the tax remains unpaid after 30 days, a further 2% penalty is applied to the outstanding amount.

A second late payment penalty is applied on day 31. The penalty accrues on a daily basis at a rate of 4% per annum until the outstanding tax is paid.

Entering into an agreed HMRC Time To Pay (TTP) arrangement, has the effect of stopping any further late payment penalties accruing from the date the TTP is agreed, as long as the taxpayer honours the terms of the agreement.

Late Payment Interest

HMRC charges late payment interest on any tax that is outstanding after the due date, irrespective of whether any late payment penalties have been charged. It is calculated at 2.5% plus the Bank of England base rate. For any repayments of overpaid tax, HMRC pays interest at 1% less than the Bank of England’s base rate, with a minimum of 0.5%.

Late Submission Penalty

There are further penalties for failing to provide returns on time. Instead of receiving an automatic financial penalty for missing a submission deadline, taxpayers will accrue points. At certain threshold points, financial penalties are levied. The threshold is determined by the submission frequency.

Until these changes come into effect, the default VAT surcharge system which applies to late filing and late payment, remains in place.

Stuart comments;

“We hope that the new system will be fairer, allowing businesses some leeway when payments are delayed or submission deadlines are missed unintentionally. We endorse the Treasury’s decision to delay the reform by 9 months, to allow full testing of its IT capabilities to support the new penalties and interest charges system.”