NEW - HMRC's VAT penalty scheme

Charlotte Allen
January 27, 2023

Now that MTD for VAT is fully operational across all businesses, it’s being followed by two new VAT penalty regimes from HMRC for individuals or businesses that make late submissions and payments.

The good news is that the new systems are less severe and fairer than the previous ways HMRC penalised businesses. In this blog, we cover details on HMRC’s new penalties, how the systems work, and when they will apply.

When do the new MTD penalty systems apply?

The new penalty systems applied to Making Tax Digital for VAT submissions for VAT accounting periods beginning on or after 1st January 2023

Once Making Tax Digital for Income Tax begins, the new penalty systems will apply to that too.

It's good to note - to allow traders time to become familiar with the new rules, late payment penalties will not be charged during the first year (1 January 2023 to 31 December 2023) where payment is made in full within 30 days of the due date.

How does the new MTD late submission penalty system work?

Similar to speeding fines for motor vehicles, the new late submission system is based on a points system. After a certain number of points are reached by a business or individual, a financial penalty of £200 is automatically applied.

In general terms, one point is applied each time a submission deadline is missed. HMRC will notify you at that time.

As you might expect, you can appeal both points and penalties – see below.

The points threshold for the penalty varies depending on how frequently the individual or business is required to make submissions to HMRC.

  • Monthly: Five points are required for the penalty to be applied
  • Quarterly: Four points are required
  • Annual: Two points are required

Points are intended to encourage compliance with submission dates. Here's an example;

A company submits their VAT Return quarterly. This means their penalty point threshold is 4.

They already have 3 penalty points because they submitted 3 previous returns late.

They submit their next return late and get a fourth penalty point. Because they’ve reached the penalty point threshold, they receive a £200 penalty.

The company submits their next return on time. They stay at threshold of 4 penalty points but do not get a £200 penalty.

The company submits their next return late. As they’re still at the penalty point threshold of 4 points, they receive another £200 penalty.

Do MTD penalty points expire?

Points expire after two years, although this is counted from the month after the month in which the individual or business received the point.

In other words, this could effectively be two years and almost a whole month later.

But points don’t expire in this period if the individual or business is at the penalty threshold (that is, a £200 fine has been applied).

For those at the threshold, a period of good behaviour must occur in which the individual or business meets all submission deadlines. They must also have made all submissions that had been due in the preceding 24 months – regardless of whether these were late or not.

The required periods of good behaviour are 24 months for an annual submission frequency, 12 months for a quarterly submission frequency, and six months for monthly submission frequency.

What are the new late payment penalties?

Alongside the new late submission penalty points system, HMRC is introducing a new late payments penalty system.

Like the points system, this is automatically applied, and operates as follows:

  • Up to 15 days after payment was due: no penalty.
  • Day 30 after the payment was due: 2% of the amount.
  • Day 31 after payment was due: 2% of what was due on day 15, plus 2% of what was due on day 30.
  • Day 31 onwards: 4% of the outstanding amount, applied daily.

Furthermore, the standard 2.5% interest rate is applied, as with other HMRC penalty systems.

To avoid or mitigate the above penalties, if you miss the submission deadline you can either make a payment, or arrange a payment schedule across 12 months with HMRC (known as a Time to Pay arrangement).

Can I appeal against the points or penalties for MTD?

Points and penalties are applied automatically but HMRC may, at its discretion, not choose to do so. This will be in line with “published guidance” that HMRC says it will follow.

Once a point or penalty has been applied, HMRC can’t remove it unless you use the reviews and appeals process.

This can be used in any event if you wish to challenge points or penalties that have been applied.

The first stage of this will be an interview HMRC review process. Then you can then move to the First Tier Tax Tribunal if you believe the outcome is unsatisfactory.

Appeals must include a reasonable excuse for missing a deadline.

What do businesses need to do?

Other than being educated about what to expect, there’s little businesses can do to prepare for the new penalty systems apart from ensuring they’re ready in plenty of time to meet the submissions deadlines. For further information about the new VAT penalty and interest scheme get in touch with the team, we'd be happy to help.

If you have any other questions or we can help you with any accounts or bookkeeping support please get in touch. Email the team or call 01858 289 189.

Thanks for stopping by,

Charlotte & The Business Hut Team

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