The regime is a point-based system, similar to driving penalties. It has been introduced with the understanding that one-off mistakes aren’t penalised, focusing on those who continuously don’t comply.
Often changes to familiar processes and rules can be overwhelming, but in this circumstance the new penalty system is essentially fairer than previous systems HMRC used to penalise businesses.
Everyone who submits VAT returns are affected by the new rules, but what does the new system really mean? Our Head of Bookkeeping Aimee Calcott explains the key factors about how the point system works and how to avoid a £200 penalty:
Late VAT returns and point system
Late submission of VAT returns will be points based, so for every VAT return that is filed late, a point will be received. Once the total amount of points has reached a certain threshold, a fixed penalty of £200 will be charged.
This threshold is dependent on how tax payers file their VAT returns. If you file your submissions quarterly and missed the deadline, you would incur 4 points, five points if submitted monthly and two points for annual VAT returns.
It’s also important to highlight that if you file a nil return or reclaim, although previously you wouldn’t have received a penalty, you will do now under the new scheme.
Late payments of VAT penalties
Two new penalties have been introduced, dictated by how late the payment is:
- A 2% penalty of the VAT unpaid at day 15, with a 2% of the unpaid VAT added at day 30
- At day 31, a second penalty will be charged daily, based on a rate of 4% of the remaining outstanding amount
In order to clear any penalties, you’ll need to demonstrate good compliance (submitting all returns on time) for a specific period. Points will expire after two years if you’ve not reached threshold of points. You will also need to submit any outstanding returns due from the previous 24 months. If a business has already reached the threshold, it becomes difficult to clear points already accumulated.
Avoiding a penalty
Of course, the best way to avoid any penalties is filing returns and paying VAT on time. However, if you’re struggling to pay your VAT bill, you still need to file your return on time. You can then contact HMRC for a Time to Pay Agreement, and avoid the risk of £200 penalties.
Unaffected VAT returns
There are some exceptions for late submission rules. Penalties won’t apply if:
- You’re newly VAT registered
- Final VAT return after you’ve cancelled your VAT registration
- One-off VAT returns that cover a period other than a month, a quarter or a year
Can I appeal a point or penalty?
If you receive a penalty point or £200 penalty, HMRC will send you a letter known as a penalty decision letter. Within the letter, a review with HMRC will be offered. Your penalty can be cancelled or amended if there is a valid reason for late submission.
Final thoughts
HMRCs new penalty system for late return submission and payment of VAT follows on from the full implementation of Making Tax Digital (MTD) for VAT.
The new system looks at giving more leeway to those with a genuine reason for late submission, as penalties are not implemented unless numerous late submissions occur- there will still be fixed penalties combined with interest for late payments.
Those mainly affected will be those submitting late returns when there is no liability to pay or a reclaim is due, as in the past no penalty would have been charged for this scenario.
Here to guide you through the changes
If you have any worries or concerns about the new penalty regime, we are here to help. Our expert team are here to offer support and guidance on VAT returns. If you’d like to talk through queries, or would like some initial advice on the new system, please get in touch.
