HMRC’s new penalty regime for late filing and late payments of VAT will be fairer but more complex with interest being charged on all late payments

From 1 January 2023, HMRC will introduce a fixed rate, points based penalty system for VAT submissions. Initially HMRC has said there will be a ‘light touch’ approach to the new regime in the first year of operation.

Under the new rules, there will be a single penalty point for each late submission of a VAT return. When a business has exceeded the points threshold, a fixed rate penalty of £200 will be issued for each subsequent late return.

For businesses on standard quarterly returns the threshold is four points in any two-year period. For those on monthly returns, it will be five points and for those submitting annual VAT returns, just two points.

Points will be reset to zero when all returns have been filed and there has been a continuous period of good compliance (12 month for quarterly filings, six months for monthly filings and 24 months for annual filings).

Alan Pearce, VAT partner at Blick Rothenberg said: ‘The new regime will be fairer to businesses by penalising those that persistently file and pay late, rather than those that make the odd slip up.

‘It will replace the current default surcharge regime that has been widely criticised for levying significant penalties where payment is only one day late. However, unlike the current regime, there will be a more complex multi-tier penalties system with interest also being charged on all late payments.’

The new regime will effectively have four different types of charges:

• a fixed penalty amount for late filings based on a points system (a similar concept to totting up points for driving offences);
• an initial two-part fixed rate penalty for late payments of 2% and 4% (applying to the first 15 and 30 days);
• ongoing 4% daily interest-based penalty (applying after 30 days); and
• interest charged at 2.5% above the Bank of England base rate (applying from the outset).

‘The new penalty regime is more complicated than the current default surcharge regime. However, it appears to be fairer to those businesses that might occasionally pay late and rewards those that do their best to pay outstanding tax as early as possible,’ added Pearce.

‘Under the current rules businesses are often hit with large surcharges of between 2% and 15% for simply being one day late. This can often be caused by a one-off administration error or banking delay.

‘The change should therefore be welcomed and should avoid the need for many default surcharge appeals where the amount of the penalty is disproportionate to the amount and timing of the late payment.

‘For many defaulters, the new rules will result in a relatively small penalty and interest having to be paid. However, for businesses that persistently fail to submit their VAT returns on time and are frequently more than 30 days late in paying, they will suffer the highest level of penalties and interest. It seems that HMRC have struck a balance of penalising serial offenders more heavily while incentivising compliance and being more lenient on those that make the occasional slip up.’ 

Pearce expanded on the ‘light touch’ approach in year one.

He added: ‘HMRC has announced it will apply a “light touch” for the first year of operation. Specifically, where a business is doing its best to comply, HMRC will waive the first 2% fixed penalty for VAT periods up to the end of 2023.

‘This effectively means that provided payments is received within 30 days of the due date (or, during this period, an approach to HMRC has been made for a time to pay application) penalties can be avoided. However, even where agreement is reached with HMRC, interest will still apply.’

Penalty points threshold

Submission frequency	Penalty points threshold	Period of compliance
Annually	2	24 months
Quarterly	4	12 months
Monthly	5	6 months

The reduced rate VAT for hospitality venues is to end tomorrow with the VAT rate increasing from 12.5% back to the original 20%

The VAT reduction, which was introduced for businesses trading in the hospitality sector in June 2020, ends on 1 April with the VAT rate going back up to its original rate of 20%.

The reduction in VAT was given to VAT-registered businesses from the hospitality, hotel and holiday accommodation sectors to financially support them during the initial lockdown of the Covid-19 pandemic. VAT originally dropped to 5% in July 2020 with the rate increasing to 12.5% in October 2021.

The Federation of Small Businesses (FSB) stated that the increased VAT is just another hit to businesses still struggling to recover from the pandemic. In addition, 31 March is the final day that businesses can pay back in full deferred VAT covering the period to June 2020.

UKHospitality stated that the move ‘might prove fatal’ for business owners and that the removal of the lower rate lifeline ‘dashes the hopes that many businesses could begin to recoup some of the losses of the last two years’.

Kate Nicholls, chief executive, UKHospitalty said: ‘Locking in VAT at 12.5% would have given hospitality businesses a major boost and helped the sector in its ambition to lead the UK back to post-Covid prosperity.

‘As it is, thousands of jobs could be lost, the UK will remain uncompetitive versus international rivals, and already hard-pressed consumers in the midst of a cost-of-living crisis will see price rises in their favourite pubs, bars and restaurants, further fuelling inflation.’

Described by the FSB as the ‘April flashpoint’ from 1 April the national living wage rate for over 23s goes up to £9.50, the 66% business rates discount comes to an end, and the requirement for businesses to make their VAT returns Making Tax Digital (MTD) compliant is also introduced.

From 3 April, Statutory Sick Pay (SSP) is also set to rise to £99.35, and from 6 April the 1.25% increase to National Insurance contributions (NICs) hits employees, employers, and sole traders, as well as a rise in the dividend rate.

The FSB highlights that according to statistics from the Office of National Statistics (ONS) Covid-19 infection rates are rising with one in seven business not currently trading at full capacity due to infection rates.

The current cost of living crisis, rising Covid cases, and the rapidly increasing inflation and energy costs, are causing ‘huge anxiety’ for businesses across the UK with 5%, which is around 250,000 businesses, fearing ‘imminent collapse’, FSB warned.

Martin McTague, national chair, FSB, said: ‘There’s no use hiding from the facts though: this April flashpoint will push some firms to the brink.

‘The spiralling energy costs are causing huge anxiety for small firms trying to navigate the energy market remaining sandwiched between domestic consumers protected by a price cap, and big corporates, which have the leverage to secure the best deals.  

‘With so many business owners and employees now forced to isolate as Covid infection rates soar, we and the TUC are urging the government to launch a permanent a sick pay rebate that covers all absences to protect livelihoods.’