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VAT Penalties from 1 January 2023 and don’t forget your right to challenge

Historically, VAT surcharges and VAT penalties for late submission of returns have been criticised for being disproportionate, and out of line with similar charges for other taxes. The surcharge, levied for submitting and/or paying a VAT return after the due date is currently the same (a fixed percentage of the VAT due, from 2% up to 15%) regardless of whether the VAT was paid one day or one year late.

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


What will the new late payment penalties regime look like?

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

  • 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


The new scheme is potentially fairly wide ranging and covers more than just VAT returns.  The late payment regime will apply to the following which are paid more than 15 days after the due date:

  • VAT returns*
  • Assessments (i.e. estimates of VAT returns if you don’t submit a VAT return)
  • Amendments or errors found by the tax payer (i.e. a voluntary disclosure)
  • Errors found by HMRC at VAT visits, for example


When will the reforms come into effect?

The VAT default surcharge regime was due come to an 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, on 1 January 2023, the system was replaced by the new penalty system with separate penalties for late submission of VAT returns and late payment of VAT.


HMRC to adopt a light-touch approach

HMRC has confirmed that it will take a light-touch approach to the initial 2% late payment penalty 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.


VAT Surcharges and Penalties can be successfully challenged

The reforms, shaping 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 specialist VAT team can assist you in understanding the chances of success and can help you make an appeal to HMRC.  The 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.

Again, the grounds for appeal will depend on the circumstances of how the penalty arose, but often 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 Gemma McCaldon-Gower, your usual Cowgills contact, or visit our website here.

VAT penalties

The information was correct at time of publishing but may now be out of date.

Posted by Cowgills
6th January, 2023
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