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New VAT late payment and interest rules introduced | accountingweb
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New VAT late payment and interest rules introduced

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A new penalty and interest regime will be brought in from 1 January for late filing and late payment of VAT. Emma Rawson takes a look at the changes to late-payment penalties and interest.

28th Oct 2022
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From 1 January 2023, a brand-new penalty and interest regime will be rolled out for late filing and late payment of VAT. This will represent a real shake-up of the rules, especially compared to the existing default surcharge regime.

While my previous article looked at the rules that will apply for late submission of VAT returns, here we will look at the changes to late-payment penalties and interest.

How will the new late-payment penalties work?

The new penalties will replace the default surcharge rules for VAT periods starting on or after 1 January 2023, with the first taxpayers to enter the new regime those in stagger group 1 and monthly filers. Any VAT due in respect of periods starting before 1 January 2023 will continue to fall within the default surcharge regime, regardless of when it is paid.

Under the new regime, there are two separate late-payment penalties – referred to as the first penalty and second penalty.

The first penalty has two separate legs:

  1. 2% of the VAT unpaid at day 15
  2. 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 set at 2%.

The second penalty only comes into effect from day 31. This operates rather 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. There will however still be late-payment interest (see below).

Importance of Time to Pay arrangements

One welcome feature of the new late-payment penalty is the acknowledgement of Time to Pay (TTP) arrangements. These are effectively treated in the same way as payment when it comes to stopping the penalty clock. Provided the TTP application is ultimately successful, the date on which it is first requested is treated as the date of payment. For example, if TTP is requested from HMRC on day 14, no penalty will arise regardless of how long it takes for HMRC to approve the TTP arrangement. 

However, if the terms of that TTP agreement are subsequently broken by the taxpayer, the first and second late-payment penalties will be charged as if the TTP had never had effect. This means that missing a single scheduled payment under the TTP 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 penalty charged.

Period of familiarisation

In the first year of the new late-payment penalties there will be a “period of familiarisation”. Under this, HMRC will not charge the first leg of the first penalty (the 2% at day 15) from 1 January 2023 until 31 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.

This soft landing may be welcome by some, especially if they are having cashflow difficulties. However, it’s unlikely to be a good idea to let clients get into the habit of paying late, not least because they might slip up when the period of familiarisation ends. Rising interest rates may also make delaying payment less attractive than it first appears. 

Interest changes

The way interest is applied to late payments and repayments of VAT is also changing from 1 January 2023, bringing it more in line with other taxes.

From that date, 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%.

Alongside this, the repayment supplement will be withdrawn for accounting periods beginning on or after 1 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. This rate for repayment interest will be much lower than that for late-payment interest, being set at the Bank of England base rate minus 1% (subject to a minimum rate of 0.5%). 

The much less generous nature of repayment interest (especially compared with the current repayment supplement) may come as a surprise to those used to receiving VAT back from HMRC. It also raises concerns as to whether, given HMRC’s current service levels, the reduced incentive to make timely repayments will result in taxpayers waiting even longer to receive the amounts they are due. 

Next steps

It’s a good idea to speak to VAT-registered clients now about the new penalty and interest regime. While the new late-payment penalties have some attractive features – in particular the fact that missing a payment by a few days will no longer result in a penalty – there are other aspects that could catch people out, such as the loss of repayment supplement and the harsh consequences of breaching a TTP.

We are expecting detailed HMRC manual guidance to be published on the new penalties and interest regime in December. In the meantime, a high-level prepare page has been published on gov.uk.

 

Replies (9)

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By Paul Crowley
28th Oct 2022 13:08

Much appreciated

Thanks (1)
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By twohaporth
28th Oct 2022 21:12

Here we go again, more dishonesty from HMRC and HMG.

What it really means is "We have taken so much in taxes and wasted it that we don't dare to raise taxes any more so - know what - let's rise the money by fines. Get all the jobsworths in HMRC and elsewhere to dream up a few new fines.
We've got GDPR, MTD, Motoring offences, H&S offences - hey guys let's have a few more - But don't fine the protesters who block roads and spray paint over windows because they are good woke people - You can fine people for using cars in towns though - that's a good earner."

They think we are mugs and suckers - and do you know they are probably right.

Thanks (9)
Replying to twohaporth:
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By Postingcomments
29th Oct 2022 14:07

And the professional bodies are completely complicit in anything within their remit.

In fact, they spend a lot of our money helping the government write the tax legislation and making it watertight - or more so than it was after the public sector lawyers had done their best.

Thanks (2)
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By AndrewV12
31st Oct 2022 09:37

'One welcome feature of the new late-payment penalty is the acknowledgement of Time to Pay (TTP) arrangements.'

Well that's good news, its all about communication with HMRC followed by pleading and grovelling.

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By Jason Croke
31st Oct 2022 09:52

Nice article, thank you.

I think this new penalty regime is a little more forgiving than the current penalty regime, whereby miss payment by 1 day and you get hammered with a penalty.

I do agree that HMRC seem to be seeing penalties as a revenue raising exercise, although HMRC will likely argue that the penalties are meant to drive compliance and that they'd rather not have to issue penalties....the thing is, tax is getting complicated and as we saw with the Post Office Horizon case and the chaos at the borders after Brexit, that HMRC's systems are simply not up to scratch but HMRC will blame the user or the third party software provider for any errors.

Added to that, the very obvious drive for HMRC to remove agents from the equation and to leave taxpayers at the mercy of HMRCs technical glitches and aggressive attitude, I can see the penalty as revenue raising as a failure of HMRC, not as a good thing for the Treasury.

Thanks (6)
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By tedbuck
31st Oct 2022 10:54

Same old - same old - not honest enough to raise tax openly so do it by penalties instead.

If HMRC were subject to penalties for their own incompetence and laziness we could all retire but they can charge 'customers' penalties for being late filing.

We ought to be able to charge them as well.

I don't, in all honesty, have a lot of sympathy for late filers/payers but HMRC should set an example not sit there po-faced criticising other people for being as inefficient as them.

I have a client who is waiting for a sec 455 refund which is so overdue that it has grown hair. Another accountant to whom I spoke has just received a reply to a letter from November 2021.
Another had a response to a penalty appeal, lodged in Dec 2021, this month - the response was negative and wrong - and has since been corrected and the penalty cancelled. What a fiasco.

This simply isn't good enough.

Thanks (4)
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By ds
31st Oct 2022 11:37

Perhaps someone with knowledge of the law can answer. Penalties are not fines issued by a court and so what legal force do they have ? What happens if you refuse to pay them ? Where is their legality?

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Replying to ds:
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By rememberscarborough
31st Oct 2022 15:54

Think you'll find the law is on HMRC's side. After all Mr Capone got away with many things but not paying tax wasn't one of them....

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By Ian McTernan CTA
31st Oct 2022 17:07

So, more complication and little agent interaction, but we'll have to try and explain how HMRC came up with their figures...

Ok, got it.

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