New VAT Penalties regime
Penalties for late payment and interest harmonisation
- For VAT taxpayers from periods starting on or after 1 January 2023.
- For taxpayers in Income Tax Self-Assessment (ITSA), from the tax year beginning 6 April 2024 for taxpayers with business or property income over £10,000 per year (that is, taxpayers must submit digital quarterly updates through Making Tax Digital for ITSA).
- For all other ITSA taxpayers, from the tax year beginning 6 April 2025.
The taxpayer will not incur a penalty if the outstanding tax is paid within the first 15 days after the due date. The taxpayer incurs the first penalty if the tax remains unpaid after day 15. This penalty is set at 2% of the tax outstanding after day 15. If any of this tax is still unpaid after day 30, the penalty will be calculated as 2% of the tax due after day 15 plus 2% of the tax outstanding on day 30. In most instances, this will amount to a 4% charge at day 30.
If the tax remains unpaid on day 31, the taxpayer will begin to incur an additional penalty on the tax that remains outstanding. It accrues daily, at 4% per annum on the outstanding amount. This additional penalty will stop accruing when the taxpayer pays the due tax.
HMRC will offer taxpayers the option of requesting a Time-to-Pay (TTP) arrangement. This enables a taxpayer to stop a penalty from accruing further by approaching HMRC and agreeing on a schedule for paying their outstanding tax. A TTP arrangement, if agreed, has the same effect of paying the tax and stops penalties accruing from the day the taxpayer approaches HMRC to agree on it, as long as the taxpayer continues to honour the terms of the TTP agreement. The examples below illustrate how TTP work and the effect of a TTP is shown in this chart:
|Days after payment due date||Action by customer||Penalty|
|0-15||Payments made or TTP is proposed by day 15 and then agreed||No penalty is payable|
|16-30||Payments made or TTP is proposed by day 30 and then agreed||The penalty will be calculated at half the total percentage rate (2%)|
|Day 30||Some tax is still unpaid; no TTP agreed.||The penalty will be calculated at the total percentage rate (4%)|
If tax is still unpaid on day 31 a second, an additional penalty will start to accrue at 4% per annum.
Where HMRC might not assess a late payment penalty
HMRC has discretionary power to reduce or not charge a penalty for late payment if it considers that appropriate in the circumstances. This will include special circumstances that cause a taxpayer to pay their tax late.
HMRC recognises that moving to the new system of late payment penalties is a significant change for some customers, especially those who might have more difficulty getting in contact with HMRC within 15 days of missing a payment to begin agreeing on a Time-to-Pay arrangement. HMRC will therefore take a light-touch approach to the initial 2% late payment penalty for customers in the first year of operation of the new system under both VAT and ITSA.
A taxpayer is doing their best to comply; HMRC will not assess the first penalty at 2% after 15 days, allowing taxpayers 30 days to approach HMRC in the first year before HMRC charges a penalty. However, if a taxpayer has not approached HMRC by the end of day 30 and there is still an amount of tax outstanding, the first penalty will be charged 2% of the amount outstanding at day 15 plus 2% of what is still outstanding at day 30. In most instances, this will amount to a 4% penalty.
Additionally, there is no penalty if the taxpayer has a reasonable excuse for late payment. If HMRC is satisfied, a taxpayer has a reasonable excuse, HMRC will agree not to assess. This will prevent the taxpayer from unnecessarily having to appeal.
How the new late payment and repayment interest charges work
HMRC will charge late payment interest on tax outstanding after the due date, irrespective of whether any late payment penalties have also been charged. The late payment interest will apply from the date the payment was due until the date on which HMRC receives it. Late payment interest will be calculated as simple interest at a rate of 2.5% plus the Bank of England base rate.
Where a taxpayer has overpaid tax, HMRC will pay Repayment Interest (RPI) on any tax due to be repaid (the difference between the amount owing and the amount paid) either from the last day the payment was due to be received or the day it was received, whichever is later, until the date of repayment. RPI will be paid at the Bank of England base rate of less than 1% (with a minimum rate of 0.5%).
Late payment interest and Time-to Pay arrangements
Late payment interest is charged when tax is paid late. HMRC will always try to help taxpayers in temporary financial difficulty manage payment of their debt. Late payment interest will continue to accrue on amounts not paid on time, even if those amounts are included in the Time-to-Pay arrangement.
If you need any advice on the late payment changes by HMRC, please get in touch with us by calling 02082271700 or email firstname.lastname@example.org