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Businesses in the United Kingdom Prepare for a New Penalty System in 2023

January 9, 2023

The United Kingdom has confirmed a new VAT penalty system, and companies have little time to prepare for the impending shift. What you need to know about the new points-based system and how it impacts your VAT reporting procedure in the United Kingdom.


Businesses in the United Kingdom prepare for a new penalty system in 2023


VAT reporting and payment penalties and late fees are nothing new. However, beginning on 1 January 2023, HMRC will implement a new penalty system, which will fundamentally alter how penalties are administered. Are you prepared for the forthcoming modifications? Here is the information you need to avoid unanticipated fines in the new year.


What is the new penalty regime for VAT?


The purpose of the new VAT penalty system is to encourage more taxpayers to file and pay on time. It will also distinguish between late submission costs and late payment fees, resulting in a more organized system.


The new approach is frequently seen as more equitable, since it penalizes persistent offenders more severely than those who miss a deadline occasionally. It should be noted, however, that it is somewhat more complicated than the present method and will effect the filing procedure.


The new penalty regime levies penalties for late VAT returns. 


The new penalty plan will be based on a point system, wherein VAT-registered enterprises would get one penalty point for each late VAT return filing. There is a predetermined number of penalty points authorized for businesses. HMRC will begin assessing penalties once the threshold (defined by the frequency of VAT returns) is reached.


The following are the thresholds for penalty points:


Annual VAT returns: 2 points


Quarterly VAT returns: 4 points


Monthly VAT returns: 5 points


For accounting periods starting on or after January 1, 2023, the new points-based system will affect everyone filing a VAT return.


If a company exceeds the aforementioned penalty-point restrictions, they will incur a £200 fine. In addition, if repeated late submissions occur, no extra points will be added, but firms will incur an additional £200 penalty per late submission. 

Businesses registering for VAT will be permitted to reset their penalty point total. However, this will only be approved if all outstanding VAT returns for the preceding 24 months have been submitted to HMRC. In addition, firms must have filed taxes on time for 24 months (if submitting annual returns), 12 months (if submitting quarterly returns), or 6 months (if submitting monthly returns).


HMRC expanded on the VAT penalty revision and claimed that the goal is to enhance the recovery of delinquent VAT. The most important change to the penalty system is the addition of graduated fines, which may encourage people to pay earlier because they aren't as harsh. 


Interest and penalties for late VAT payments


Beginning on or after January 1, 2023, the new penalty system for late VAT payments will include both interest and penalties. The interest rate is the Bank of England base rate plus 2.5% from the day the payment is due until the date it is paid in full. This will apply to all VAT-registered companies in the United Kingdom, regardless of whether or not they have a Time to Pay (TTP) agreement.


If the VAT is paid within 14 days of the due date, no late payment penalty will be assessed in addition to the applicable interest. If the late payment exceeds 14 days, a penalty of 2% of the unpaid VAT will be assessed (on day 15). 2% more will be added on day 30.  A further 2% will be added on day 30. If the payment is made after the 30th day, a daily penalty of 4% per year will be applied until the VAT is paid in full.


Requesting a Time to Pay (TTP) agreement


If a VAT-registered firm asks for a TTP agreement by the fifteenth day, no late payment penalty will be assessed. However, the interest remains relevant. Therefore, under these situations, it is more important for firms to apply by Day 15 than to get HMRC clearance by Day 15.


The suspension of a penalty under a TTP agreement is only possible if firms comply with the arrangement's criteria. These terms are stringent and should not be taken lightly. If a TTP agreement is in place and a firm misses even a single payment, full penalties will be assessed regardless of whether or not prior payments were made on time.


Avoid fines with the aid of experts.


Do not get entangled in the complexities of the new VAT penalty regimes. With the assistance of our UK VAT professionals at VAT IT, you can be confident that all payments and submissions will be timely submitted and paid appropriately.

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