The introduction of Making Tax Digital (MTD) VAT has prompted questions about the penalties that may be incurred if a business does not comply. A new system of penalties for late submission and payment of VAT will apply from January 2023, replacing default surcharge. Other breaches may incur one of the existing regulatory penalties.
VAT surcharges and penalties that need to be considered fall into two broad categories:
Late submission and payment
Default surcharge continues to operate for VAT accounting periods that start before the end of 2022 when it will be replaced by points based late submission penalties, late payment penalties and interest (details below). There is no soft landing or light touch for default surcharge on the introduction of MTD VAT.
No default surcharge is payable if the VAT liability is paid by the due date and no surcharge is payable for the first default. Late submission of a return alone does not result in a default and HMRC’s view is that no soft landing or light touch is required because default surcharge can be avoided by paying the VAT due by the deadline and it is not charged for the first default.
VAT accounting periods starting on or after 1 January 2023 – Late submission and payment penalties and interest
Legislation to introduce a new system of penalties for late submission of VAT returns was introduced by Finance Act 2021 (s116 and Schs 24 and 25).
Finance Act 2021 also introduced new penalties for late payment of VAT (s117 and Sch 26) and the charging of interest on late paid VAT (s120 and Sch 29).
The new rules are complex. ICAEW’s Tax Faculty will be publishing further guidance and arranging a webinar closer to the start date.
Summaries of the new rules are available on gov.uk
One group that is most likely to be affected by the new rules is repayment traders who can file late without incurring default surcharge but may incur the new £200 late submission penalty.
HMRC has shared a chart that confirms the starting date for different accounting periods:
HMRC has the power to charge a penalty of up to £400 for filing a VAT return other than electronically without the prior agreement of HMRC (reg. 25A, VAT regulations 1995, SI 1995/2518). This power has been rarely used but has been extended to the obligation to file VAT returns using MTD functional compatible software. HMRC is expected to start charging this penalty to those that have not signed to MTD VAT, probably later in 2022.
General regulatory penalty
HMRC has the power to charge a penalty for failure to comply with certain regulatory requirements (s69 (1), VAT Act 1994). The penalty rates for such a failure are:
- If there has been no previous failure to comply with the requirement within two years prior to the present failure - £5 per day.
- If there had been only one such occasion in that period - £10 per day.
- In any other case - £15 per day.
There is a minimum penalty of £50. The penalty rate is applied to the number of days a failure continues up to a maximum of 100 days.
These penalties are not automatic. The penalty can only be charged if HMRC has issued a written warning within the previous two years (s76(2), VAT Act 1994). These penalties also apply to breaches of the MTD VAT regulations.
HMRC did not start enforcing the requirement to have ‘digital links’ in place between different pieces of software that make up the MTD functional compatible software until 1 April 2021 (this deadline was extended as a result of the COVID-19 pandemic). This was to allow some more time for links between legacy systems to be digitalised. During this period manual transfer of data between different systems was permitted but the final transfer of data into the MTD compliant software product from which the return is filed had to be digital. For example, the transfer of data from a spreadsheet or legacy system into MTD compliant bridging software must be digital.
Note that there is no similar digital links soft landing for businesses required to join MTD VAT from April 2022. The digital links requirement applies from the outset.
Record keeping penalty
HMRC has the power to charge a penalty for failure to keep the required VAT records (s69(2), VAT Act 1994). The maximum penalty is £500. This penalty cannot be charged in addition to the general regulatory penalty outlined above. The Tax Faculty’s understanding is that the general regulatory penalty is more likely to be used by HMRC.
Other VAT penalties
There are other VAT-related penalties that are unaffected by MTD requirements but may need to be considered. These include:
- Inaccuracy penalties. HMRC has the power to charge tax- geared penalties where there is an under-declaration of VAT due to an inaccuracy. The percentage penalty charged depends on HMRC’s view of the type of behaviour and whether the disclosure was unprompted or prompted
- Failure to register for VAT
- Failure to notify HMRC within 30 days of a VAT notice of assessment of tax that it is too low. These assessments are issued when a VAT return is not filed and the failure to notify penalty is 30% of the assessment
- Penalties for late filing and/or late payment - only charged ‘where default surcharge has been ineffective in ensuring compliance’
There is a formal right of appeal against each of the different types of penalty. Possible grounds for appeal are
- reasonable excuse for late filing, payment or other failure to comply with the regulations
- in relation to inaccuracy penalties, that the trader took reasonable care to avoid errors and inaccuracies when filing their VAT return
These grounds for appeal will continue unchanged; if there is an issue connected with introducing new systems and processes this may be a relevant factor when appealing against a penalty.
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