Andrew Needham looks at the new penalty regime for late VAT payments.
As well as penalties for late VAT return submissions, new penalties for late VAT payments apply from 1 January 2023.
How much?
The penalties are as follows:
- 0–15 days: no penalty;
- 16–29 days: 2% of the amount outstanding; and
-
30 days: 2% of the tax outstanding on day 15 plus 2% of the tax outstanding on day 30.
If any tax is still unpaid on day 31, an additional penalty will be incurred. This will accrue daily at a rate of 4% per annum on the outstanding amount.
'Time to pay’ arrangements
HMRC will offer businesses the option of requesting a ‘Time to pay’ (TTP) arrangement. This enables a business to stop a penalty from accruing any further by approaching HMRC and agreeing to a schedule for paying their outstanding tax.
A TTP arrangement, if agreed, has the same effect as paying the tax and stops penalties accruing from the day the business approaches HMRC to agree to it, as long as the business continues to honour the terms of the TTP agreement.
The effect of a TTP is shown below:
|
Days after payment due date |
Action by customer |
Penalty |
|
0–15 |
Payments made or TTP is proposed by day 15 and then agreed |
No penalty is payable |
|
16–30 |
Payments made or TTP is proposed by day 30 and then agreed |
The penalty will be calculated at half the full percentage rate (2%) |
|
Day 31 |
Some tax is still unpaid, and no TTP agreed |
The penalty will be calculated at the full percentage rate (4%) |
Penalty let-outs
HMRC has the discretionary power to reduce or not charge a penalty for late payment if it is considered appropriate in the circumstances. This will include where there are special circumstances that cause a business to pay its tax late.
HMRC recognises that moving to the new system of late payment penalties is a significant change for some businesses. HMRC will therefore take a ‘light-touch’ approach to the initial 2% late payment penalty for businesses in the first year of operation of the new system.
Where a business is doing its best to comply, HMRC will not assess the first penalty at 2% after 15 days, allowing the business 30 days to approach HMRC in the first year before HMRC charges a penalty. However, if a business has not approached HMRC by the end of day 30 and there is still an amount of tax outstanding, the first penalty will be charged at 2% of the amount outstanding at day 15 plus 2% of what is still outstanding at day 30. In most instances, this will amount to a 4% penalty.
Additionally, there is no penalty if the business has a reasonable excuse for late payment. If HMRC is satisfied a business has a reasonable excuse, HMRC will agree not to assess the penalty.
HMRC also has the discretionary power to reduce or not to charge a penalty for late payment if it is considered appropriate in the circumstances. This will include where there are special circumstances that cause a business to pay its tax late.
If HMRC decides not to use its discretionary power or does not agree that a business has a reasonable excuse for late payment, the business must use the appeals and review process to challenge a penalty. Where the reasonable excuse for late payment comes to an end, the business will not incur a late payment penalty if they then pay the tax promptly.
Practical tip
The new penalty regime for late payments mean that payments received a few days late will not attract a penalty. TTP agreements are now also formally written into law and should reduce the size of penalties overall. However, the new system is complex and will take businesses some time to get used to.
