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HMRC’s new VAT penalty system: what businesses need to know

| Christine Newitt | 24 March 2023

Are there any three words that inspire greater and more instant fear than ‘fixed penalty notice’?

For business owners especially, the prospect is not only daunting but downright disappointing. Well, with HMRC’s new penalty regime for VAT now officially in place, you’ll need to make sure that you know the pitfalls to avoid the penalties.

As of 1 January 2023, the new Making Tax Digital system is live and enforceable - but what’s changed and what does it mean for businesses?

The new points-based VAT penalty system: an outline

Essentially, there are now points-based penalties for submitting your tax returns late. Each and every time you submit them after the deadline, whether that’s monthly, quarterly or annually, you’ll accrue points.

Gain enough points against your name and you’ll ultimately earn a £200 fine, as well as accumulated interest.

However, it’s not as dire as you might think. In fact, for most well-intentioned businesses, it’s a positive thing. The new points-based penalty system is actually designed to be more lenient than the previous ad hoc model; this is because you must exceed your permitted points allowance before you are charged, making it less of an undertaking for businesses that make the occasional slip-up, but much more of a problem for persistent offenders. This means that you’re forgiven the odd slip-up and have more leeway before being fined.

For example, every late VAT submission equates to one point, meaning a minimum of three late submissions before actually being charged, which is based on submitting annually. Let’s dive into the details to learn more.

Explaining the points total of the new HMRC VAT guidelines

Let’s break down the points total and what it really means to you on an operational level. If you submit your returns annually, you need to exceed a total of two points in order to meet the criteria needed to be hit with a fixed penalty notice. For those who submit quarterly, you won’t be charged until you exceed four points. If your business submits returns monthly, it’s five points that you’ll need to exceed before you’ll be issued with a notice.

The new system is weighted, meaning that points can remain for months or even years depending on the frequency of your submissions. For submissions that are annually, quarterly or monthly, the period of time the points will remain on your record (and therefore be actionable) is 24, 12 and 6 months respectively. For example, if you submit your returns on a monthly basis and do this late on four occasions, you’ll have four points on your account for 2 years before they refresh - meaning that every subsequent late submission will see you charged.

Appealing a fixed-penalty notice for late VAT payment

Sometimes, you can miss the mark and submit after the deadline, even with the best intentions. If the worst happens and, for one reason or another, it simply wasn’t possible to file it on time, don’t worry: you can always appeal a fixed-penalty notice if you have a ‘reasonable’ excuse.

What is considered ‘reasonable’ is limited to events that feasibly couldn’t be predicted, such as an unexpected hospital stay or the death of a loved one. Best practice would always be to stay on top of your submissions where possible.

It’s also worth noting that throughout 2023, HMRC is adopting a soft roll-out of the scheme in order to allow businesses to adapt to the new guidelines, so it will not hand out penalties until at least 30 days after the due date of any missed submissions. This gives businesses that are genuinely running a little behind - whether because of a busy schedule or unexpected surge in demand - a little extra time to ensure your affairs are in order.

After 1 January 2024, this buffer period reduces to 16 calendar days before fines automatically become applicable.

Getting your head around the changing legislative landscape can be challenging, so if you’d like to learn more about the revised fixed-penalty system for late VAT payments, get in touch with our team of expert accountants and business advisors today


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