A new penalty and interest regime will be brought in from 1 January 2023 for late filing and late payment of VAT.
From 1 January 2023, a brand-new penalty and interest regime will be rolled out for late filing and late payment of VAT.
In a previous article we looked at the penalties that will apply for the late submission of VAT returns, here we will look at the changes to late-payment penalties and interest.
How will the new late-payment penalties work?
The new penalties will replace the default surcharge rules for VAT periods starting on or after 1 January 2023. Any VAT due in respect of periods starting before 1 January 2023 will continue to fall within the default surcharge regime, regardless of when it is paid.
The first penalty has two tranches:
- 2% of the VAT unpaid at day 15
- A further 2% of the VAT unpaid at day 30
If the VAT continues to be unpaid after 30 days a second penalty will be levied at a daily rate of 4% per year for the duration of the outstanding balance. This will be calculated once the outstanding payment has been made in full.
The biggest change under the new regime is that, provided all outstanding VAT is paid within 15 days of the due date (or a Time to Pay arrangement is requested within that same period), no late-payment penalty will arise. There will however still be late-payment interest (see below).
Importance of Time to Pay arrangements
One welcome feature of the new late-payment penalty is the acknowledgement of Time to Pay (TTP) arrangements. These are effectively treated in the same way as payment when it comes to stopping the penalty clock. Provided the TTP application is ultimately successful, the date on which it is first requested is treated as the date of payment.
However, if the terms of that TTP agreement are subsequently broken by the taxpayer, the first and second late-payment penalties will be charged as if the TTP had never had effect. Under this, HMRC will not charge the first leg of the first penalty (the 2% at day 15) from 1 January 2023 until 31 December 2023.
To allow time for taxpayers to get used to the changes, late payment penalties will not be charged for the first year from 1 January 2023 to 31 December 2023.
Late Payment Interest Charges
The way interest is applied to late payments and repayments of VAT is also changing from 1 January 2023, bringing it more in line with other taxes.
From that date, late-payment interest will be charged from the day a VAT payment becomes overdue until the date it is paid in full. The rate applied will be the Bank of England base rate plus 2.5%.