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The UK tax system underwent significant changes in the VAT penalty system, which took effect on January 1, 2023. The new system focuses on a points-based model, promoting better tax compliance and making it easier for businesses to understand and navigate the penalties associated with late VAT submissions and payments. This article outlines the key features of the new VAT penalty system and its implications for businesses.
Points-based system: The new VAT penalty system replaces the previous default surcharge model with a points-based system. This change aims to provide a fairer and more consistent approach to managing late VAT submissions and payments. Under this system, businesses will accrue penalty points for late submission of VAT returns or payment of VAT liabilities. Points are allocated as follows:
- One point for each late VAT return submission.
- One point for each late VAT payment.
Penalty threshold: The penalty threshold varies depending on the frequency of a business’s VAT return submissions:
- Annual submissions: 2 points.
- Quarterly submissions: 4 points.
- Monthly submissions: 5 points.
Once a business reaches the penalty threshold, it will receive a penalty of £200 for each subsequent late submission or payment, regardless of the frequency of its VAT returns. This amount remains fixed and does not increase with subsequent late submissions or payments.
Points reset: Businesses have the opportunity to reset their points balance to zero by maintaining good compliance. The points reset rules vary depending on the frequency of VAT returns:
- Annual submissions: Points reset after two compliant submissions.
- Quarterly submissions: Points reset after four compliant submissions.
- Monthly submissions: Points reset after six compliant submissions.
It’s important to note that points will not reset automatically; businesses must maintain compliance to clear their points balance.
Reasonable excuse: Under the new VAT penalty system, businesses can avoid accruing penalty points if they can demonstrate that they had a reasonable excuse for the late submission or payment. Examples of reasonable excuses include:
- Serious illness or disability.
- Unforeseen technical difficulties.
- The recent death of a close relative.
Businesses must provide evidence of their reasonable excuse to HMRC within 30 days of the penalty notice being issued.
The new VAT penalty system, effective from January 1, 2023, focuses on a points-based model, promoting better tax compliance and simplifying the process of managing late VAT submissions and payments. Businesses must understand and adapt to these changes to avoid penalties and maintain good standing with HMRC. It’s always best to consult with a qualified accountant or tax advisor to ensure you meet all tax obligations and navigate the new VAT penalty system effectively.
If you need help with VAT penalties, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.