New Late Return and Payment Penalty System

In the past, many businesses will have been subjected to the Default Surcharge regime that penalised them for either submitting or paying VAT returns after the due date or the date they were due to be paid in full.

That penalty regime was significantly ‘black and white, as it took no notice of how late the return or payment was; it simply penalised the business at the same level no matter whether the return or payment was a couple of days late or a couple of years late.

That all changed on 1/1/2023 when a new, arguably fairer, penalty system was introduced, with this new system applying to all returns starting on or after that date.

The old penalty system still applies to returns starting before that date, but wherever in the old Default Surcharge system a business was at 1/1/2023, the slate is wiped clean and their old position in the old system is not carried through to the new penalty system, although any penalties raised under the old Default Surcharge system will still remain due.

Currently, there is little detailed guidance issued by HMRC regarding how this new late return and payment penalty system works, but, from that guidance, it can be broken down into 3 parts: the date of receipt of the return, the date of receipt of the full payment, and the length of time the payment remains unpaid, with penalties for each.

The penalties can be summarised as follows:

Late Return Penalty

If a return is received late, the business ‘earns’ a penalty point, and, assuming the business is on quarterly returns, once the business reaches 4 points, they will receive a fixed £200 penalty for that return and then a £200 penalty for each subsequent late return.

This obviously means that, even if the business pays the VAT due on the return on time, they may still earn a point or get a £200 penalty if they submit their return late.

Assuming the business is on quarterly VAT returns, the business must go a full 12 months without submitting a late return to reset their points score to nil.

There is nothing in the guidance issued by HMRC to suggest they have allowed a ‘soft landing’ period in regard to this particular part of the penalty system, and so points start clocking up for any returns starting on or after 11/2023 that are received late.

Late Payment Penalty

If the business does not pay the VAT due on time, then penalties are now based on the length of time the VAT due is paid in full, whether or not there is a late return penalty, and on top of any penalty charged for the late return.

The timing of payments, and thus any penalty charged, is split into 3 time slots:

• If full payment of the VAT due in the period is made up to 15 days after the due date of the return, then no penalty is charged.
• If full payment of the VAT due in the period is made between 16 and 30 days late, then a 2% penalty is charged on whatever VAT is left unpaid at day 15.
• If full payment of the VAT due in the period is made 31 days or more late, then a penalty will be charged, calculated at 2% of the amount of VAT unpaid at day 15 plus 2% of the amount of VAT unpaid at day 30.

A subsequent further daily penalty will be charged for the remaining time the VAT is unpaid, calculated at a rate of 4% per year and charged at the time the outstanding amount is paid in full.

For the purposes of all of the above late payment penalties, agreeing to a Time to Pay plan with HMRC is equivalent to making a payment.

HMRC’s guidance does confirm that they have given a conditional ‘soft landing’ in regard to this particular part of the penalty system, meaning that between 1/1/2023 and 31/12/2023 no late payment penalty will be charged provided full payment is made or a time to pay plan is agreed upon within 30 days of the payment being due.

Late Payment Interest

Interest will also be charged on the overdue payment, irrespective of whether any late return penalty or late penalty payment is charged.

Again, there is nothing in HMRC’s guidance to suggest they have allowed a soft landing’ period for the charging of late payment interest.

Written by Tony Pocock