The current default surcharge regime for VAT has often come in for criticism, with the penalties applied being disproportionate to the length of delay. From 1st January 2023, a new VAT penalty regime will replace the outgoing default surcharge system. The penalties under the new system will now be referred to as ‘Late submission penalties.’
The changes come following a series of consultations starting back in 2015 and were eventually introduced in the Finance Act 2021. The main aim from HMRC’s standpoint is to bring consistency to how they treat late filing and payment of VAT returns with the other major taxes. Until now, previous attempts to bring uniformity to the various penalty regimes had excluded any reform to VAT.
THE CURRENT SYSTEM – FOR VAT PERIODS STARTING BEFORE 1 JANUARY 2023
The previous system focused on late payments and imposed penalties based on repeated late payments within a 12-month period. Following an initial warning letter on the first offence, these penalties started at 2% and were capped at 15% of the net VAT due to HMRC. Taxpayers’ liability to surcharge would expire when submission and payment of all outstanding returns had been brought up to date and compliance had continued for a period of 12 months from the last instance of non-compliance.
Under the old default surcharge system taxpayers would be liable to a surcharge if you were late a second time for turnovers over £150,000 or a third time for turnovers under £150,000. The taxpayer would then stay in this surcharge period until they were compliant for the next 12 months.
Therefore, for taxpayers with turnover over £150,000, a 5th default where the return was submitted one day late could result in a 15% penalty, a disproportionate charge in any one’s books.
Importantly, the surcharge was based upon the VAT liability due on the return. Under the old system, there was no financial penalty for nil or repayment returns.
