A contractor’s guide to VAT penalty changes effective from January 2023

The New Year is almost upon us, and as we’ve seen in previous years with the likes of IR35 and Making Tax Digital, new changes from HMRC affecting contractors are paramount to get on top to remain on the right side of the Revenue.

All change from January for VAT penalties

From January 2023, VAT requirements will see a new penalty regime being introduced for any registered business owners who miss the VAT submission deadline – and as with any update from HMRC, there is a wide range of factors to consider. 

Despite this new regime changing the ways in which VAT-registered businesses are charged late payment penalties, it’s important to remember that proactive tax planning and ensuring VAT returns are submitted and paid on time will avoid unnecessary penalty fees and mean that many business owners may never need to worry about the new penalty regime at all!.

Nonetheless, as to be forewarned is to be forearmed, here and exclusively for ContractorUK, technical compliance manager at SJD Accountancy, Joanne Thorne, explains the changes to VAT penalties, below.

What do VAT penalties from HMRC look like currently? 

Currently, VAT-registered businesses that do not submit their VAT return by the required deadline will be subject to the default surcharge regime. This means that a ‘default’ will be recorded against their account by HMRC. 

The amount of surcharge that is currently due depends on whether a business turns over more or less than £150,000 per year and will be based on a percentage of the amount of VAT owed. The more times VAT returns are submitted late within a 12-month period, the higher the default surcharge. However, it must be noted that under the current default scheme, there is no surcharge payable on a late VAT return if there is no liability to pay, or a refund is due.

One-time offenders are also not required to pay the charge the first time, but if they miss the deadline and register another default within 12 months, they may be required to pay a penalty on top of the VAT they owe. 

The default surcharge is a penalty introduced by HMRC to encourage VAT registered to submit their VAT returns on time and avoid unnecessary penalties. Admittedly, the current system is a bit of a ‘one-size-fits-all’ approach, whereby VAT-registered businesses that seldom miss the deadline receive the same treatment and punishment as those who consistently submit late payments.

How are VAT penalties from HMRC changing in the New Year?

From January 2023, late submission penalties will work on a points-based system for late submissions and payments. 

For VAT returns periods that start on or following January 1st 2023, businesses will receive a penalty ‘point’ for each time a VAT return is submitted late. Depending on the frequency of VAT submissions (annual, quarterly, or monthly), different businesses will have a set number of points they can accrue before a penalty is charged by HMRC. 

Upon reaching this point threshold, VAT-registered businesses will be fined a £200 penalty fee, with an additional £200 being charged for any subsequent late submissions. Despite additional financial penalties for any additional late submissions, no further points will be added. 

At the first default, under the new regime, the business will enter a period of “compliance.” VAT-registered businesses can reset their penalty point threshold to return the total penalty points to zero, but HMRC must have received all VAT returns from the previous 24 months and must submit all future VAT returns on time, within their relevant period of compliance. The compliance period is a great way of helping to encourage businesses to adhere to their statutory filing and payment requirements and avoid future late penalties. 

The submission frequency, penalty thresholds and accompanying periods of compliance are: 

What penalties and interest will be charged for late payments moving forward? 

For VAT return periods that start after the introduction of the new penalty regime on January 1st 2023, late payments will accrue both interest and penalties. 

Late payments will attract interest from the due date until full payment has been submitted. This is charged at the Bank of England base rate -- (currently) + 2.5%, and will be charged even when a Time To Pay (TTP) arrangement has been arranged. 

For any repayments made within 14 days of the due date, the business will not receive a penalty. If no payment has been made by day 15, a penalty will be charged at the rate of 2% of the outstanding VAT owed to HMRC, with a further 2% added to the VAT still outstanding on day 30. 

From day 31, the VAT-registered business will incur a daily interest rate of 4% per annum until the VAT is repaid in full. 

What about businesses with a Time To Pay arrangement? 

For businesses with a TTP, whereby a company is awarded extra time by HMRC to bring their tax arrears up-to-date, the TTP must have been applied for by day 15 to avoid a late payment penalty charge. HMRC does not need to have awarded the agreement, but the application must have been submitted by this point. 

This suspension will only remain in place if the VAT-registered business complies with the requirements outlined in the TTP arrangement. 

TTP agreements are an essential way of supporting VAT-registered businesses that have made genuine mistakes when it comes to organising their tax affairs.

However, it must be stressed that adhering to the requirements of the TTP agreement and ensuring payments are made on time is crucial. Missing one agreed payment could result in full penalties being charged, even in instances where all previous repayments have been made on schedule. 

When do these VAT penalty changes from HMRC officially take effect?

The new VAT penalty regime scheme comes into force from January 1st 2023.

But in a welcome concession for contractors, no first late payment penalties will be charged in 2023 (provided businesses pay their VAT in full within 30 days of the due date), to offer VAT-registered businesses time to familiarise themselves with the changes. 

Our take? These changes allow for a far more transparent and personalised VAT penalty charge process, giving some breathing room to VAT-registered businesses that are adjusting to VAT submissions and timescales and who may make some initial mistakes. 

However, the added interest rates on late payments will certainly be one to watch, especially given the volatility of the BoE base rate in recent months, as interest will be charged at the standard, national base rate. 

The new VAT penalty regime is certainly a step up compared to the previous default surcharge, and the soft launch in 2023 will allow VAT-registered businesses and accountants alike to take some time to fully understand the changes.

Final considerations for VAT-registered limited company contractor-directors

While these new changes are a lot for contractors to digest, the key takeaway is that VAT-registered business owners should be ensuring that all VAT returns are submitted and liabilities due are paid, on time to avoid falling foul of the penalty regime. 

As with any change to organising tax affairs, proactive planning is essential. Business owners should work closely with their accountants to ensure they have all the information needed to complete the VAT return on time. 

Planning for VAT submissions helps avoid unnecessary penalty points, late charges and interest rates. Moreover, taking a proactive approach and engaging with a qualified accountant is crucial, perhaps nowhere more so than when the taxman is trying out a new penalty system that could catch out the unaware or unadvised.