Drat the VAT

VAT could be described as a necessary evil for companies with a turnover of more than £85,000 a year. And now the rules surrounding penalties are changing with effect from 1st January 2023.

This isn't just a few tweaks, there are significant penalties if you don't file on time or fail to pay on time.

With the old rules (still current until 31st December) there were no late filing penalties at all.

There were, however, late payment surcharges, but these were based on a system of defaults. A default would be either late filing or late payment of a return. You don't pay a surcharge the first time you default. If you default again within a 12 month period, that surcharge period extends for another 12 months – and you may have to pay extra on top of the VAT that you owe.

  • If you file your return late, you won't pay a surcharge as along as you pay your VAT in full by the deadline – or if no VAT is due or a refund is due.
  • If you pay late, there's a incremental scale of surcharges, depending on how many offences, how much your turnover is and how late you pay.

The new system

All that is about to change there will now be two separate penalty systems, one for late filing and one for late payment.

Late filing penalties

This will operate on a penalty points system a bit like your driving licence.

For a business filing VAT returns quarterly, every quarter that you blot your copy book when it comes to submitting your VAT return you get points – get 4 points and this will result in penalties. It doesn't matter whether you owe VAT or not – you'll still get fined for late filing (particularly relevant to note for those filing nil returns or refund trainers). The penalty is £200 per late return.

Like points on your driving licence, you have to have a period of compliance, effectively 4 quarters of getting it right, to 'reset' your record to zero.

Late payment penalties

When it comes to paying your VAT late, there is no longer a points or default system. Penalties will apply as follows EVERY time you pay your VAT late:

  • Up to 15 days overdue – No penalty
  • Between 16-30 days overdue – 2% of the VAT you owe at day 15
  • 31 days overdue – a further 2% on the VAT you owe at day 30
  • More than 31 days overdue – a penalty calculated at a daily rate of 4%pa for the duration of the outstanding balance.

If you really can't pay your VAT on time you will need to agree a payment plan with HMRC within two weeks of the payment due date to avoid the surcharges. So don't ignore it, it really won't go away and will simply be a drain on your profits.

Don't forget that there is interest charged on late payment on top of the penalties described above. This is no longer 2-3%, but due to the increase in the base rate more like 5.5%, which makes late filing and late payment of your VAT an expensive mistake to make.

A little sunshine on the horizon is that HMRC will pay interest on your overpayments or refunds - but at 1% below the Bank of England base rate, so much less than they demand if you've got their money!

The penalty process with VAT is now more in line with other taxes. HMRC's view is that VAT is not your money, you're just collecting it on their behalf. That means that, even if it's in your bank account, it should be ring-fenced to pass on to them, generally you should have very little excuse for not being able to make payments. 

Our advice would be always to prioritise payment of VAT as the penalties for not doing so are some of the most expensive that HMRC apply.