The new penalty regimes for Making Tax Digital will apply for VAT periods beginning on and after 1 January 2023, but HMRC has some other penalties they can apply to slow adopters.
Two new penalty regimes for late filing and late payment, which were to come into effect for VAT from 1 April 2022, have been deferred until January 2023.
Here is more on when the new penalties will bite.
Two new regimes
The current VAT default surcharge regime covers both late payment and late filing of VAT returns all in one system.
This is quite different to the regimes that apply for other taxes where separate penalties generally apply for late payment of tax, and late filing of returns. Think of the fixed £100 penalties for late filing of self assessment tax returns, and the 5% penalty charge that applies where tax is paid more than 30 days late.
HMRC has been planning to reform the penalty rules to make them more consistent across all taxes for some time, and MTD provides a trigger to do that. However, the new penalty regimes for VAT have not been aligned with the final rollout of MTD for VAT, apparently because HMRC needs extra time to make the necessary changes to its IT systems which are required for the new penalties.
The new late payment plus interest and late filing penalty regimes are certainly more complicated than the current VAT default surcharge, so I can see why additional time for programming may be needed.
Periods starting before 2023
Where the VAT period starts before 1 January 2023, the payments and VAT returns will be subject to the current default surcharge VAT penalty regime.
Although MTD filing will be compulsory for all VAT registered traders for VAT periods beginning on and after 1 April 2022, there will be no waiving of penalties for late VAT returns filed under MTD or for late VAT payments relating to those returns.
However, for the smaller businesses joining MTD for VAT for the first time in April 2022, a special waiver may not be necessary, as the default surcharge has extra leniency built in for businesses with turnover less than £150,000.
Those small businesses do not receive a monetary penalty under the VAT default surcharge system until they make the third late filing or late payment within 12 months. If the penalty is calculated at less than £400 it is not charged until possibly the fifth default.
Periods starting on and after 2022
The new late filing and late payment penalty regimes will apply to all VAT periods that start on or after 1 January 2023.
For businesses with quarterly VAT periods the start dates for the new penalties are set out in the table:
|VAT stagger group||First affected VAT accounting period:||Late payment penalty and interest applies from:||Earliest possible late filing penalty starts running:||Earliest date late filing penalty could be imposed:|
|1||1 Jan to 31 March 2023||8 May 2023||8 May 2023||8 Feb 2024|
|2||1 Feb to 30 April 2023||8 June 2023||8 June 2023||8 March 2024|
|3||1 March to 31 May 2023||8 July 2023||8 July 2023||8 April 2024|
Light touch late payment penalties
Under the new late payment penalty regime, the trader is not charged a penalty if they pay their VAT liability within 14 days of the due date, although interest will be charged. Where the VAT is paid between 15 and 30 days late a 2% charge applies, and over 30 days late triggers a 4% charge.
HMRC said it will take a light-touch approach to the initial 2% late payment penalty for taxpayers in the first year of operation.
Where the taxpayer is doing their best to comply, HMRC will not assess the first penalty at 2% after 15 days. This will effectively give the taxpayer 30 days to approach HMRC to negotiate a time to pay agreement or pay in full, before HMRC charges a penalty.
HMRC confirmed it will apply the same approach to everyone, so “doing best to comply” should be the assumption applied to all taxpayers.
Taxpayers who refuse to engage with the MTD for VAT process completely may find they are charged a minimum penalty of £400 for failure to submit a VAT return in the prescribed format. This is a turnover related penalty, so it could be much higher than £400.
HMRC also has the power to charge a penalty of up to £500 for failure to keep the required VAT records.