The current penalty regime escalates penalties every time a tax return isn’t paid by the due date. The first overdue payment incurs a 0% penalty, with each late return thereafter incurring a 5%, 10% and 15% penalty.
A flaw in this system means that even if you’re just a day late making your payment, you will incur the same penalties as someone who is 30 days late paying.
And, once you start racking up these penalties, your business must pay on time for a year before the penalties reset to nil.
From January 2023
The updated penalty regime is more nuanced than the previous one. It is a fairer approach to penalties for most – albeit not as simple! From the 1st of January 2023, there are three occurrences that will incur a penalty:
Late submission of a return
For late filing / submission, the taxpayer receives one penalty point. Once a point threshold is hit, a flat penalty of £200 applies. So, a penalty isn’t automatically incurred by filing a VAT return late, however, frequent late returns will eventually mean a fixed penalty is applied.
You can get more details on how this works, below:
- Annual return: 2 points
- Quarterly returns: 4 points
- Monthly returns: 5 points
- Annual return: 24 months
- Quarterly returns: 12 months
- Monthly returns: 6 months
Late payment (first penalty)
Different to filing a VAT return, there is also the matter of paying the VAT return. The rules for paying your VAT return are:
- If payment is made within 15 days of the due date – no penalty incurred
- If payment is made within 16-30 days of the due date – 2% of the VAT due on top of the return
- If payment is made after 30 days of the due date – 4% of the VAT due on top of the return
Late payment (second penalty)
If your VAT return remains unpaid after 31 days, there is an additional daily penalty of 4%, commencing from day 31, until VAT is paid in full.
All late payments will also be subject to interest charges, starting from the due date to the date the VAT is paid. This interest will be calculated at 2.5% above the Bank of England interest rate.
Can I appeal the penalties?
If there is a genuine reason for not paying your tax return on time and you have gone into the 2% upwards part of the penalty system, the usual provisions apply around reasonable excuse.
Taxpayers can still request a review by HMRC in respect of any late-payment penalty charged, although it’s best to obtain advice about this before, as HMRC may be less lenient in future as the new penalty regime is already fairer in comparison to the old system.
Can I request more time?
Because it’s the first year of these new penalties, they will have a so-called, ‘soft landing’.
This gives the taxpayer a selected period of time to become accustomed to the new penalty regime, where HMRC will not charge the first penalty (the 2% from day 15 to day 30) from 1 January 2023 until 31 December 2023.
So, as long as the first payment is made before the 30th day after the due date, no late payment penalty will be incurred in the first year. The late payment interest charges will remain charged as usual.]
It is worth noting though, that although a ‘soft landing’ is handy if you have cashflow difficulties, it’s a good idea not to get into the habit of making late payments!
How can we help?
There are some aspects of the new penalty regime that could catch you and your business out, but at Tim Taylor & Co. we can help to ensure your tax return remains compliant.
Read more about the penalty updates on the HMRC website or see how we can help with your Self-Assessment, here.