Penalties for late VAT returns

The new points-based system aims to target more persistent offenders, and it’s fair to say that under the new regime, a taxpayer who rarely files late will be better off. Those who frequently file their VAT returns late may see their penalties stack up quickly and may find it harder to get out of the so-called “penalty zone”.

For each late VAT Return the taxpayer will receive one late submission point.  Once a points threshold is reached, the taxpayer will receive a £200 penalty. A taxpayer’s points threshold is determined by the filing frequency of the return: 2 points for annual returns, 4 for quarterly, and 5 for monthly returns.

Example 1: Agnes files quarterly VAT returns. She submits late returns for 3 consecutive VAT return periods. Her points counter will show three points, but she will not receive a penalty. If she files her next VAT return late she will have reached the points threshold and will receive a £200 penalty.

As well as generating a penalty, reaching the points threshold will trigger the start of a “compliance period” for the taxpayer. Any subsequent late returns during the compliance period will generate further £200 penalties. The compliance period length is also determined by the filing frequency of the return: 24 months for annual returns, 12 for quarterly, and 6 for monthly returns. If the taxpayer files all returns on time during the compliance period, and submits any outstanding returns for the past two years, their points counter will be reset to zero and their compliance period will come to an end. If, however, any returns are filed late during the compliance period, the end date of the compliance period will be revised so as to be determined by reference to the most recent late return.

The compliance periods given above will start on the first day of the month following the due date for the return, so for a return due date of 7 May 2024, the compliance period would start on 1 June 2024.

Example 2: Continuing the Agnes example above, let’s assume that her fourth late VAT return was for the quarter ended 31 March 2024, due for filing by 7 May 2024. This most recent late return would mean her compliance period runs for twelve months from 1 June 2024 until 31 May 2025. She has reached her points threshold, so any further late returns during this period will give rise to a further £200 penalty.

If she were to file all returns due, on time, during the twelve months to 31 May 2025, and she ensured that all outstanding returns are filed for the past 24 months, her points counter would be reset to zero.

Let’s say, however, that she files her next three VAT returns (for the quarters ending 30 June 2024, 30 September 2024 and 31 December 2024) on time, but she is unable to file her return for the 31 March 2025 quarter by its due date of 7 May 2025. As she is still in her twelve-month compliance period, she will receive another £200 penalty and her compliance period will be extended to 31 May 2026!

If a taxpayer has received a point but has not reached their points threshold, the individual point will expire after 24 months. This 24 month period will begin on the first day of the month following the due date of the late return that gave rise to the point.

Example 3:  Let’s revisit Agnes, who has filed four consecutive late quarterly returns and is at the start of a twelve-month compliance period. As she has reached her points threshold, individual points will not expire and the only way she can get out of the so-called penalty zone is by filing all returns on time during the compliance period and filing any outstanding VAT returns for the past 24 months.

Example 4: Another taxpayer, Beatrice, files late VAT returns for the quarters ending 31 July 2023 and 31 October 2023, triggering two points.

Let’s say she receives a further point when she files a late return for the quarter ended 31 October 2024. She would then have three points in total and she is dangerously close to triggering a penalty. However, as she has not reached her points threshold, the point she received in respect of the 31 July 2023 return will expire on 30 September 2025 and she will be left with two points.

It is worth noting that when the penalty regime applies to MTD income tax filings, a taxpayer will have separate points counters for different taxes. For example, a VAT registered sole trader would receive a point for a late VAT return and a point for a late MTD ITSA submission, but these points would be within separate counters and would not trigger a penalty.

Penalties and interest for late payment of VAT

As a familiarisation measure from 1 January to 31 December 2023, HMRC will not charge a late payment penalty if VAT is paid within 30 days of the due date.

From 1 January 2024, this period of grace will reduce to 15 days. Any VAT outstanding 15 days after its due date will attract a penalty of 2%. Any VAT outstanding 30 days after its due date will attract a further 2% penalty. This effectively means that if a VAT return is fully paid 16 days after its due date it will attract a penalty of 2%; if a VAT return is fully paid 31 days after its due date it will attract a penalty of 4%.

For VAT that is outstanding 30 days after its due date, an additional penalty will be issued. This penalty will be at 4% per annum, charged on a daily basis from day 31 until the outstanding balance is paid in full.

For these purposes, VAT is considered outstanding if it has not been paid or a time to pay agreement has not been arranged and adhered to.

For VAT return periods starting on or after 1 January 2023, late payment interest will be calculated from when the payment becomes overdue to the day it is made in full. The rate will be the Bank of England base rate plus 2.5%.

This will be a major change for those unincorporated businesses that prepare their accounts to a date other than 5 April or 31 March. From 6 April 2024 such businesses will need to compute their taxable profits from 6 April to 5 April each year, regardless of their accounting end date.

So, for a sole trader or partnership making up accounts to 31 December each year, their 2024/25 profits would be calculated as 9/12ths of their profits for the year ended 31 December 2024 plus 3/12ths of their profits for the year ended 31 December 2025.

This will invariably require the inclusion of an estimate of the profits of the later period with subsequent amendment once the final figures are known. For this reason many businesses may wish to consider changing their accounting date and we can of course advise you of the tax consequences.

More imminent is the change in the way that profits are to be taxed for the 2023/24 tax year. The upcoming tax year is scheduled to be a “transitional year” with complicated rules for calculating business profits. For many businesses the change will result in a higher tax bill and, if you can supply us with estimated figures, we can work with you to calculate the impact on your cash flow.

Please note that although MTD for ITSA will only apply to the self-employed and landlords initially, these tax year basis changes apply to all unincorporated businesses, including partnerships and LLPs, and those with profits of less than £50,000.

As mentioned before, those already preparing accounts to 31 March or 5 April are not affected.

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31/01

Note that if this liability is no more than £30,000 you can agree with HMRC to spread over 12 months

19 December 2022 – PAYE and NIC deductions due for month ended 5 December 2022. (If you pay your tax electronically the due date is 22 December 2022).

19 December 2022 – Filing deadline for the CIS300 monthly return for the month ended 5 December 2022.

19 December 2022 – CIS tax deducted for the month ended 5 December 2022 is payable by today.

30 December 2022 – Deadline for filing 2021-22 self-assessment tax returns online to include a claim for under payments to be collected via tax code in 2023-24.

1 January 2023 – Due date for Corporation Tax due for the year ended 31 March 2022.

19 January 2023 – PAYE and NIC deductions due for month ended 5 January 2023. (If you pay your tax electronically the due date is 22 January 2023).

19 January 2023 – Filing deadline for the CIS300 monthly return for the month ended 5 January 2023.

19 January 2023 – CIS tax deducted for the month ended 5 January 2023 is payable by today.

31 January 2023 – Last day to file 2021-22 self-assessment tax returns online.

31 January 2023 – Balance of self-assessment tax owing for 2021-22 due to be settled on or before today unless you have elected to extend this deadline by formal agreement with HMRC. Also due is any first payment on account for 2022-23.