Did you know that HMRC has introduced new penalties for submitting VAT returns late? And also for late payment of VAT? Failure to pay your tax can be an early warning sign that a business is insolvent. This article explains the new penalty system and what to do if you have concerns about paying your tax.   

Useful Definitions  

• HMRC – His Majesty’s Revenue and Customs, which is the UK’s tax, payments, and customs authority.  

• VAT – Value Added Tax, a tax added to most products and services. 
• VAT Return – a form which discloses how much VAT you have charged and how much VAT you have paid to other businesses. This must be completed by all VAT-registered businesses. 
• Accounting Period – an established range of time during which accounting functions are completed.  
• Insolvency – when a person or business cannot pay its debt as they fall due or where its liabilities exceed its assets.
• Creditors – a person, company or other organisation which is owed money or has a financial claim against another.

Avoiding Penalties  

HMRC will start to apply penalties for VAT accounting periods starting on or after 1 January 2023. To avoid penalties, you must:  

1. Submit your VAT returns on time; and  

2. Pay your VAT on time. 

Late VAT Returns – Penalties  

Penalties for submitting a VAT return late work on a points-based system, with one penalty point accruing for each return submitted late. If you reach your points threshold, a fixed penalty of £200 will be enforced. While you remain at the threshold, you must pay another £200 penalty for each time you submit a return late. 

The penalty point threshold is set by your accounting period and is as follows:  

• Annual Accounting Period equals a penalty point threshold of 2.  
• Quarterly Accounting Period equals a penalty point threshold of 4.  

• Monthly Accounting Period equals a penalty point threshold of 5. 

There are also non-standard accounting periods for which a different threshold applies. Your penalty point threshold will also be adjusted where you change your accounting period. For more information on this, please see the relevant Government Guidance by clicking here.  

Late Returns – Removing Penalty Points  

Under the Threshold  

Where you accrue penalty points, but these do not reach the threshold, the points will expire automatically. The expiry depends on the date the VAT return was due. If the deadline for your return was:  

• Not the last day of the month – a penalty point will expire 24 months later, on the last day of that month.  
• The last day of the month – a penalty point will expire 25 months later, on the last day of the month. 

At the Threshold  

To remove penalty points, you must:  

1. Complete a period of compliance, submitting all returns by the deadline.  A period of compliance commences on the first day of the month following the missed deadline for your accounting period. 

2. Submit all outstanding returns for the previous 24 months.  

For further information and examples of how to remove penalty points, please see the relevant Government Guidance by clicking here.   

Late VAT Payment – Penalties  

A late payment penalty applies when a VAT payment is more than 15 days overdue. A second late payment penalty will be enforced where the payment is more than 30 days overdue.  

In addition to this, late payment interest begins to accrue from the day after the payment was due to the day payment is provided in full. 

For more information on late payment penalties, including how to appeal a late payment penalty, please see the relevant Government Guidance by clicking here.   

Overpayment   

The repayment supplement for repaying VAT, which was five per cent, is being discontinued. If you are owed VAT and the repayment is overdue, HMRC will pay you repayment interest at the Bank of England’s base rate minus 1%.  

Eligibility for Repayment  

You will not be eligible for repayment interest where: –  

• You have made an overpayment in error, for example, you paid £1000 in error instead of the requested £100. 
• You have outstanding VAT returns. 

For more information on repayment interest on overpayments of VAT, please see the relevant Government Guidance by clicking here.   

What to do if you have concerns about paying your tax

The inability to pay a tax bill may be an early warning sign that a business is insolvent, or that insolvency is imminent.

It is important to know that when a company is in financial difficulty and there is a risk of insolvency, directors owe a legal duty to Creditors to minimise their losses.

If you have any concerns with regards to a business’ insolvency, whether as an individual, director or company, taking advice early is very important. This will help you protect the business and its position. Communicating with HMRC is also important as this may enable you to put in place time to pay arrangements.

Further Information  

At Bailoran, we avoid legal jargon and aim to help you understand and remain aware your rights and responsibilities in simple terms. Please click here for a jargon buster of insolvency terminology and here for a jargon buster of general legal terminology.

To access more information on this development, please see the Government Guidance on VAT Penalties and Interest by clicking here.

This article does not contain legal advice. Should you require legal advice, please contact us on 0113 266 0735 or at info@bailoransolicitors.com.