VAT Penalties after 1 January 2023 and remember – you have the right to challenge!

Historically, VAT surcharges for late submission of VAT returns have been criticised for being disproportionate, and out of line with similar charges for other taxes.

The Finance Act 2021 introduced a new penalty regime for VAT with HMRC attempting to make the system fairer.

 

What does the new late payment penalties regime look like?

Under the new regime there are three separate charges for late VAT returns and payment as follows:

  • Late submission of the actual VAT return (not the payment)
    • Penalties will be points-based, with a financial penalty of £200 being issued for every missed submission on, and after, a relevant points threshold is reached.   In a U-turn from the historical regime, late submission penalties will apply to all VAT returns, including nil returns, and those where there is a repayment due to the business.
  • Penalties for non-payment of VAT due, by the due date:
    • Penalties will be proportionate to the amount of tax owed and how the late payment is
    • No penalty will be chargeable on tax paid up to 15 days after the due date
    • A 2% penalty will be chargeable on tax paid between 16 and 30 days after the due date increasing to a 4% penalty chargeable on tax unpaid after 30 days
    • A further 4% annualised penalty rate will be chargeable on outstanding tax due after 30 days
  • In addition, interest will be charged on the outstanding amount – 2.5% above the Bank of England Base Rate

 

When did the new regime come into effect?

The VAT default surcharge regime was due come to end on 31 March 2022, but it was extended until 31 December 2022 to “allow HMRC to ensure the IT changes necessary for the new penalties and interest charges could be introduced as effectively as possible.”

So, since 1 January 2023, the system was replaced by the new penalty system.

 

HMRC adopting a light-touch approach at first

HMRC has confirmed that it will take a light-touch approach for customers in the first year of operation of the new system.

HMRC said that, in the first year, where a taxpayer is doing their best to comply, it will not assess the first penalty at 2% after 15 days, allowing taxpayers 30 days to approach HMRC before it charges a penalty.

However, if a taxpayer has not approached HMRC by the end of Day 30 and there is still an amount of tax outstanding, the first penalty will be charged according to 2% of the amount outstanding at Day 15 plus 2% of what is still outstanding at Day 30. In most instances this will amount to a 4% penalty.

No penalty will be due if a taxpayer has a reasonable excuse for late payment and HMRC has discretionary powers to reduce or not to charge a penalty for late payment if it considers that appropriate in the circumstances.

 

Remember – VAT surcharges and penalties can be challenged

Of course, a fairer system with reduced surcharge penalty percentages will be welcome to both taxpayers and advisers but with any new system, there are likely to be teething problems and businesses are advised to take advice if they believe penalties or surcharges have been issued incorrectly.

Under both the current and new regime, businesses that have received default surcharges and other penalties from HMRC for VAT, may be able to appeal.

 

When can default surcharges be appealed?

Default Surcharges can be appealed where there is ‘reasonable excuse’ for the VAT return being sent in late or payment being made late.  HMRC will not usually accept lack of funds as reasonable excuse, but where it can be proved that there are exceptional reasons, such as fraud, delayed repayments from other taxes or from HMRC are the reason for non-payment, this can be reasonable excuse.

Other examples of ‘reasonable excuse’ include:

  • Illness of key personnel
  • Loss of records
  • Issues with hardware/software
  • Fire or flood in the premises
  • Break in
  • Issues with HMRC systems (i.e. HMRC recording the business as ‘missing’ and stopping VAT returns)
  • HMRC failing to action changes requested in good time due to Covid and other reasons (i.e. updating a VAT group)

 

We can help challenge a VAT surcharge or penalty

If you have received a surcharge and want to understand whether you have a reasonable excuse, our team can assist you understand the chances of success and can help you make an appeal to HMRC.

Our team have been successful in having a number of default surcharges overturned.

Penalties for making errors on VAT returns, and failing to take reasonable care, are charged at a percentage of the tax loss suffered by HMRC on the error.  The percentage is based on the severity of the error, and whether it was disclosed to HMRC, or concealed.  These penalties can also be appealed.

It’s possible to reduce the level of the penalty or suspend the penalty (based on satisfying a number of conditions).  It is also possible, in some cases, for a penalty to be withdrawn completely.

If you would like a no obligation discussion on how we may be able to help you appeal a surcharge or penalty get in touch with your usual CHW contact or email us at hello@chw-accounting.co.uk.


This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.

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