Changes to VAT penalties from 1 January 2023 – What our clients need to know

What is the new points based system?

• VAT returns that start on or after 1st January 2023 are subject to the new points-based system.
• You still have 1 month and 7 days from the end of your return period to file the return but now you have a further 14 days to pay if you owe VAT to HMRC. 
• If you do not file your return within that 1 month and 7 days, you will be issued a penalty point. 
• If you file your VAT monthly, if you’re late 5 times (5 points) you will be issued a £200 penalty with the 5th point. 
• If you file your VAT quarterly, if you’re late 4 times (4 points) you will be issued a £200 penalty with the 4th point. 
• Each late return after the threshold is reached will attract another £200 penalty until your points are reset.

How to reset your points

• All outstanding VAT returns from the past 24 months must be filed.
• For monthly submissions, you must file 6 returns on time.
• For quarterly submissions, you must file 4 returns on time.
• After both these criteria are met your VAT points will reset to zero. You will still be subject to interest on outstanding VAT if the returns are filed on time but remain unpaid past the 15-day mark stated above.
• Points will not increase if you are receiving penalties and you will not be fined for returns that are filed on time after the threshold is met.

If you’re inconsistent with your filing however, it will be very difficult to reset your points as the returns have to be consecutively filed on time.

What if your business is OWED VAT by HMRC?

• Most farming businesses reclaim VAT regularly from HMRC.
• Under the current regime any business in a repayment position is unaffected by late filing.
• However, the new regime will penalise businesses who are in a repayment position and file their returns late. They will be subject to the points system above.

Our clients will need to file their returns on time consecutively to ensure they receive the full amount of VAT they’re entitled to claim.

What if your business OWES VAT to HMRC?

Under the new regime if you file the VAT return later than 1 month and 7 days you will be issued a penalty point. Under the old regime, HMRC would issue you a letter assessing a much larger figure than you owe to make you file the return.

• If you accumulate the maximum points total, you will be issued a £200 penalty.
• As well as the penalty you will be subject to an interest charge on outstanding VAT, if the amount owed isn’t paid within 14 days of the due date.
• On the 15th day to the 29th day interest is charged daily at 2%.
• On the 30th day onward, interest is charged at 4% daily until the balance outstanding is paid.
• The repayment timeframe is based on the due date for filing the return. This means if you are a month late filing your return you will immediately be subject to the 4% daily interest.

This can be very expensive when combined with the £200 late filing penalty.

On the old system default surcharges were issued for late payments ranging from 2%-15% depending on how many times you didn’t comply in a 12-month period.

Why are HMRC doing this?

HMRC are doing this to reduce the penalty for one-off offenders and to shift the attention to people who consistently don’t adhere to the correct VAT protocols.

Our advice

• Make sure you have checked your latest VAT return position and ensure that all late returns are filed and up to date by 1 January 2023.
• Ensure whoever completes your VAT returns has the time and support needed to complete them in a timely manner, consistently, and they understand the implications of the new rules.
• For farming businesses, claiming VAT back monthly is best for cashflow. With cashflow looking tight, this should be the default option for most.
• Exceptionally, if you are unable to consistently file VAT returns on time every month, consider moving to quarterly returns to avoid penalties.

Disclaimer: The information contained in this note is of a general nature and is not a substitute for professional advice. Please speak to us to obtain specific professional advice before you take any action. No responsibility for loss to any person acting or refraining from action as a result of this budget note is accepted.