Changes to VAT penalty regime delayed until 2023

The government has announced plans to delay the introduction of penalties for late submission of VAT returns

The new penalty system was due to come into effect from 1 April 2022 but this has now been delayed by nine months until January 2023.

In a statement to MPs, Lucy Frazer, financial secretary to the Treasury, said: ‘In Finance Act 2021, the government legislated to reform penalties for late submission and late payment of tax, initially from 1 April 2022, and to align interest charges for VAT with other major taxes.

‘Today, I am announcing that these changes for VAT businesses will now be introduced nine months later, on 1 January 2023.

‘HMRC is committed to becoming one of the most digitally advanced tax authorities in the world. The ambition and pace of change needs to be balanced with well-tested systems and good customer service, particularly when businesses are facing additional challenges and uncertainty.

‘This extra time allows HMRC to ensure the IT changes necessary for the new penalties and interest charges can be introduced as effectively as possible, ensuring a high standard of service to customers.’

The plan was to bring the VAT penalty system in line with existing penalties which apply to direct tax returns.

Under the proposed changes, there will be a two-tier penalty system. Firstly there will be a late submission penalty – HMRC will issue a single penalty point for a late submission of a VAT return and, once the business has exceeded a points threshold for multiple missed returns, a flat penalty of £200 will be imposed for each late return.

The penalty thresholds will be as follows:

Submission frequencyPenalty threshold
Annual2 points
Quarterly (including MTD for ITSA)4 points
Monthly5 points

Points will have a lifetime of two years after which they will expire.

Taxpayers will have one points total for each submission obligation they have. For example, if a taxpayer is required to provide an annual ITSA return and quarterly VAT returns, they will have separate points totals for ITSA and VAT. If both returns are late, a point will be applied to the points total to which the return relates — one for the group of annual returns for the late ITSA return, and one for the group of quarterly returns for the late VAT return. If both returns had an annual submission frequency, there would still be two separate points totals, one for ITSA and one for VAT, and the taxpayer would incur a single point for each if both returns are late.

There will also be late payment penalties – this will be a two-part penalty. The first charge will be imposed at 2% of the outstanding tax if the tax due on a return remains unpaid 15 days after its due date. If any of this tax is still unpaid after 30 days, the penalty increases to 4% of the tax still outstanding at that point. The second charge is a daily penalty (set at 4% per year on the outstanding amount) starting from 31 days after its due date until the business pays the tax that is due.

Late payment interest (calculated at 2.5% above the Bank of England base rate) will be payable on tax outstanding after the due date for a VAT return. Where a payment is made after the due date, late payment interest will be payable from the due date until the date full payment of that tax is received by HMRC.

The time limit for HMRC to assess a financial penalty will be two years after the failure which gave rise to the penalty.

For taxpayers in Income Tax Self Assessment (ITSA), the new penalties will come into force from the tax year beginning 6 April 2024 for taxpayers with business or property income over £10,000 per year (that is, taxpayers who are required to submit digital quarterly updates through Making Tax Digital for ITSA).

For all other ITSA taxpayers, it will start from the tax year beginning 6 April 2025.

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