There have always been charges for submitting your VAT return late and late payments. However, since 1st January 2023, there’s been a new system which gives you VAT penalty points. It’s also changed how interest is calculated. Here’s how it works and how it could affect your business.
How does the VAT penalty points system work?
You might think that changes to tax penalties are automatically a bad thing. However, the new penalty points system is designed to be more lenient, especially if you usually submit your returns on time. You’ll get one penalty point each time you miss a deadline and will be charged a £200 penalty when you hit a penalty threshold and a further £200 for each missed filing after that. Points are given regardless of the return type so you can get them for nil and repayment returns.
Your points threshold depends on your submission period. For example, if you file an annual return, you’ll be charged when you have two penalty points. This increases to four points for quarterly returns and five for monthly returns.
Do the penalty points expire?
If you haven’t hit your penalty points threshold, your points will expire automatically within 24 or 25 months, depending on when your return was due.
However, if you’ve had to pay a penalty because you’ve reached your points threshold, you must submit everything on time within a specific timeframe to clear your points. The length of time varies depending on your submission period; it’s 24 months for annual returns, 12 months for quarterly and six months for monthly.
Are there any exceptions?
There are some exceptions to the new scheme. You won’t incur any penalty points if you’ve just registered for VAT and are filing your first return. Equally, if you’ve deregistered for VAT, there won’t be any penalty points on your final return. If you file a return to cover any period outside your usual submission period, you won’t earn points for that either.
Otherwise, no VAT-registered business is exempt from the new penalty points system.
Late payments
There are penalty charges for late payments as well as late returns. The rates differ depending on how late your payment is. You won’t be penalised for paying up to 15 days late, no matter how many times you do it.
You’ll be charged 2% of the amount you owe if you’re over 16 days late, plus an additional 2% if you’re over 31 days late. Once you go over 31 days, there will also be a daily 4% penalty, plus interest at 2.5% over the Bank of England base rate.
As you can see, the penalties can add up quickly if you don’t pay on time. The good news is that you can claim interest from HMRC if they’re late paying any refunds, although they can offset this against any other tax your business owes.
How to avoid penalties
The easiest way to avoid penalties is to file your return and pay your VAT on time. You’ll also be exempt from penalties if you contact HMRC to arrange a Time To Pay agreement. HMRC is allowing businesses some time to get used to the changes. You’ll also be able to challenge a penalty within 30 days if you have a reasonable excuse for missing the deadline.
You can find more information on the new VAT penalty points system here: https://www.gov.uk/guidance/penalty-points-and-penalties-if-you-submit-your-vat-return-late. Talking to your accountant for detailed advice is always a good idea.
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