From 1st January 2023, a new penalty and interest regime will be introduced for late filing and late payment of VAT.
This will be a present a real change to the rules and it is important to be aware of them and how they might impact you.
How will the new late-payment penalties work?
The new penalties will replace the default surcharge rules for VAT periods starting on or after 1st January 2023, with the first taxpayers to enter the new regime being those in ‘stagger group 1’ and monthly filers.
Any VAT due in respect of periods starting before 1st January 2023 will continue to fall within the default surcharge regime, irrespective of when it is paid.
Under the new rules, there will be two separate late-payment penalties – referred to as the first penalty and second penalty.
The first penalty has two separate legs:
- 2% of the VAT unpaid at day 15
- A further 2% of the VAT unpaid at day 30
This means that if no payment is made until after day 30, the first penalty will be 4% of the amount due. However, if full payment is made between days 15 and 30, the first penalty will be fixed at 2%.
The second penalty comes into effect from day 31. This operates differently and is charged daily, based on an annual rate of 4% of any outstanding amount.
The biggest change under the new regime is that, provided all outstanding VAT is paid within 15 days of the due date (or a Time to Pay arrangement is requested within that same period), no late-payment penalty will arise. Late-payment interest will still be payable.
Time to Pay arrangements
The Time-to-Pay arrangements are effectively treated in the same way as a payment in terms of halting penalties. Provided the application is successful, the date on which it is first requested is treated as the date of payment. For instance, if an arrangement is requested from HMRC on day 14, no penalty will arise regardless of how long it takes for HMRC to approve the application.
However, if the terms of the agreement are broken, the first and second late-payment penalties will be charged as if the TTP had never had effect.
Therefore, missing a single scheduled payment under the terms of the arrangement could cause full penalties to be charged, even if all previous instalment payments under the agreement have been made on time.
Outside of TTP, if a taxpayer has a genuine reason for not paying on time, the usual provisions around reasonable excuse will apply. Taxpayers and their agents will be able to request a review by HMRC or submit an appeal to the tribunal in respect of any late-payment penalties issued.
‘Period of familiarisation’
In the first year of the new late-payment penalties there will be a ‘period of familiarisation.’
Under this soft-landing approach, HMRC will not charge the first leg of the first penalty (the 2% at day 15) from 1st January 2023 until 31st December 2023. This means that, provided payment is made within 30 days of the due date, no late-payment penalty will arise in the first year the rules are in effect. Ordinary late-payment interest will however be charged as usual.
The way interest is applied to late payments and repayments of VAT is also changing from next January.
Late-payment interest will be charged from the day a VAT payment becomes overdue until the date it is paid in full. The rate applied will be the Bank of England base rate plus 2.5%.
Furthermore, the repayment supplement will be withdrawn for accounting periods beginning on or after 1st January 2023. This will be replaced by repayment interest, which will accrue from the day after the due date or submission date (whichever is later) until HMRC makes the full repayment.
Full details of the new VAT rules can be found here.
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