VAT is a tax added to goods and services at each stage of production or distribution. It’s primarily a tax on the consumer, but businesses collect and pay it to HMRC.
As VAT-registered businesses usually file a VAT return every three months, costs can quickly add up and it’s easy to miss a deadline. So what happens if you don’t pay in time? Read on to find out.
The fundamentals of late payment penalties
HMRC changed the VAT penalty system on 1 January 2023. It now uses a points system to determine when penalties are levied instead of the previous default surcharge scheme.
These points function similarly to points on your driving licence, and expire after a certain period unless you exceed penalty limits.
You’ll receive 1 point for every VAT return deadline you miss, and late submissions of nil and repayment returns also earn points.
Taxpayers who exceed the threshold limit will receive a £200 penalty, incurring an additional penalty with every subsequent missed deadline.
Penalty point thresholds are set by your submission period:
- annual accounting period: 2 points.
- quarterly accounting period: 4 points
- monthly accounting period: 5 points.
However, points aren’t assigned for the following:
- initial VAT return for new registrations
- final VAT return upon cancelling VAT registration
- special returns not aligned with the standard month, quarter or year durations.
To reset your accumulated points post-penalty, you’ll need to stay compliant for a set duration based on your accounting period:
- annual accounting period: 24 months
- quarterly accounting period: 12 months
- monthly accounting period: 6 months
What are the penalties for late VAT payments?
If your VAT bill is between 1 and 15 days overdue, you won’t incur a penalty so long as you:
- pay in full within those 15 days
- ask HMRC for a time to pay arrangement within that same timeframe.
Beyond that, you’ll attract a 2% penalty if you pay 16 to 30 days late – but a 30-day grace period applies until 1 January 2024 to allow businesses to get used to the new rules.
If you miss the deadline by 31 days or more, your first time payment penalty will be calculated at 2% of what was outstanding at day 15, plus 2% of the amount still outstanding at day 30.
For second time penalties past the 30 day deadline, a daily rate of 4% will apply, with penalties beginning from day 31 onwards.
Interest on VAT payments and penalties
Starting from the day a payment becomes overdue, late payment interest is accrued until the full payment is cleared. The rate is calculated using the Bank of England’s base rate plus 2.5%.
This interest applies to delayed VAT returns, as well as
- dues from HMRC assessments
- voluntary disclosures resulting in VAT payable to HMRC
- late Payment on Account (POA) instalments
- pending VAT penalties.
Making a “Time to Pay” arrangement
If you anticipate or experience payment difficulties, it’s crucial to engage with HMRC as soon as possible. There’s a possibility to negotiate a “Time to Pay” arrangement to allow you to pay in instalments.
If HMRC approves this arrangement, you could benefit from reduced penalties or potentially have them written off in full.
However, it’s essential to adhere to the agreed terms. If you fail to meet the conditions of your Time to Pay arrangement, HMRC could still levy penalties.
Appealing penalties
If you receive a penalty and believe it to be unjust, you have the right to appeal it. Initially, HMRC will offer a review, but if you’re unsatisfied with the outcome, you can appeal once again to a tax tribunal.
Some penalties may be cancelled or adjusted if there’s a valid, reasonable excuse for the delay.
Summary
It’s essential for VAT-registered businesses to understand the new VAT penalty points system so they can stay compliant and avoid fines.
If you need help meeting your VAT obligations from HMRC, you should get in touch with us today. We can offer expert VAT planning advice, calculate and submit your quarterly returns for you, and even make arrangements with HMRC on your behalf.