All you need to know about the new points-based approach
For VAT returns for accounting periods starting on or after 1 January 2023 a new payment penalty system will now be replaced by a points-based late filing penalty regime and a new late payment regime.
The new regime was originally due to take effect for VAT accounting periods beginning on or after 1 April 2022 but was delayed until 1 January 2023, possibly to give HMRC more time to update their systems.
The new penalty points system for late VAT returns is intended to be less punitive where the taxpayer misses the occasional deadline. The new system will penalise those who persistently miss their submission obligations and not those who make occasional mistakes.
The points system will work as follows:
A penalty will be charged when the total points equal these thresholds:
The penalty points that an individual has accumulated will not automatically expire once they have triggered a penalty. Instead, to reset the clock they must meet a test of good compliance period that will depend on the return cycle (please see below) and submit any outstanding returns due in the prior 24 months.
Good compliance period:
The new penalty system will apply in two stages: fixed penalties and daily penalties. For late payment penalties, the sooner you pay the lower the penalty rate will be. Other key points are:
To give time to get used to the changes, HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023 provided all the tax owed on a return is fully paid within 30 days of the payment due date.
Submitting the return and paying the VAT on time is the best way of avoiding the extra cost. You can also set up a direct debit, so HMRC can automatically collect the amount due, which will ensure that the deadline is not missed.
If you can't afford to pay the whole VAT amount, set up a Time to Pay arrangement with HMRC. The interest will still be charged, but the penalty clock will stop ticking.
As always, a business will have the right to appeal a late filing point or late payment penalty within 30 days of being notified of the point/penalty by HMRC, based on 'reasonable excuse'. The definition of a reasonable excuse has not changed. Because the penalties will be fairer HMRC is hoping that the new penalty regimes result in fewer taxpayer challenges.