Cautious optimism about HMRC’s new VAT points-based penalties

Accountants weigh in on whether the system succeeds in making penalties fairer.

HMRC’s new VAT penalty system for late payments and submissions is now active. It was originally due to come into force from April last year but it was postponed until January 2023.

The system is intended to make things fairer for those that occasionally miss deadlines while being tougher on repeat offenders through clocking up penalty points.

Currently, the penalty system applies to all VAT customers, but it will be extended to MTD Income Tax in April 2026 for sole traders and landlords earning over £50,000. Then in April 2027 it will be extended again to apply to those earning over £30,000 a year.

Under the points-based system, a £200 late submission will be applied once the penalty point threshold has been reached, along with a further £200 penalty for each additional late submission.

Penalty point thresholds vary depending on the frequency of submissions to HMRC as follows:

• Monthly: five points before penalty is applied.
• Quarterly: four points before penalty is applied.
• Annually: two points before penalty is applied.

It is important to note that points for VAT quarterly submissions and quarterly updates for MTD Income tax are tallied separately, so if both submissions have reached the points threshold, two £200 penalties will be applied.

The points-based system for late payment works as follows:

So what do accountants think of the new system now it’s landed? Is it fairer in practice or does the complexity undermine this effort? And what about the timing – how does it impact businesses that are already struggling with cash flow due to the cost of living crisis? We asked accountants for their views.

The new system is much less brutal

Gerry Myton, Head of Indirect Tax, HW Fisher

The equalisation of payment/repayment returns under the new regime will certainly impact the profession as the days of prioritising the submission of payment returns will cease. For clients in a permanent repayment position or those submitting an occasional repayment return (who do not need the VAT repayment to fund activity) they will need to allocate a higher priority to VAT accounting.

The new system is complex, but I think clients will welcome the 15-day payment window – although I can see it being tightened in the future. Overall, the system looks much less brutal than the old one and clients disliked being hit with a substantial surcharge when paying one day late.

Penalties are there to drive compliance and this system is not as draconian as the previous one. Yet I don’t think a penalty should be applied to someone who is owed money by the government!

On the non-payment of the actual VAT, the light touch up to 31 December 2023 is welcome but after that, the cost of non-payment does ratchet up quite quickly with an effective rate of 8% if the VAT is paid within 12 months plus interest at base plus 2.5%.

Equally, the clean slate from the old system, as at 1 January 2023, is also welcome.

Verdict: The system is less brutal than the previous one and most clients will welcome the 15-day payment window.

The 15 day payment window provides flexibility

Sherad Dewedi, Managing Partner, Shenward

The new regime is a step in the right direction for HMRC to further crack down on non-compliance. There was annoyance across the industry that limited penalties existed for those who failed to comply with tax rules and this new regime will provide some comfort. Clients feel it’s fairer to those who continuously file and pay on time.

The system is also flexible for businesses that experience a sudden change of circumstances and cannot pay their VAT straight away – there is a 15-day payment window.

Business owners want a simple and clear guide when it comes to compliance and the introduction of the new VAT scheme provides this. It does, however, reinforce the need for businesses to have quality business advisors and accountants working alongside them, ensuring they are compliant.

The penalty point system emphasises that businesses should never rely on VAT they collect as a form of cash flow. Hopefully the new regime will help businesses rethink their forecasts and income sources. Most businesses already practice good habits by putting aside the VAT from every invoice/sale until the quarterly return is done, and only then utilising cash from this which has been worked out as a rebate.

As the regime is extending to repayment traders and nil returns too (those who are registered but not liable to pay) there could be a negative impact felt here. This is where the biggest change will be felt for noncompliance.

Verdict: The new system provides flexibility for businesses that may experience a sudden change of circumstances and cannot pay their VAT on time. It also emphasises the idea that businesses should never see collected VAT as cash flow.

There’s confusion over separate penalties for late submissions and payments

Lauren Harvey, Assistant Accounts Manager, The Accountancy Partnership

While nobody is thrilled to hear of any potential extra costs, the new points-based system is fairer than the previous system. It is also more considerate of the businesses that need to submit returns more frequently as a result of the VAT accounting scheme they use.

However, there’s been confusion over the new system having separate penalties for late submissions and late payments. Ensuring that the taxpayer is aware that these systems are operating side-by-side is the problem, especially when it has the potential to make any penalties much more expensive.

Late payment penalties are also much more severe now and they kick in sooner. Of course, every business wants to pay its tax bill on time, but sometimes this simply isn’t possible. We’re likely to see more businesses struggling with rising costs at the moment and the new system will only amplify the situation.

Verdict: The new system is fairer but confusion over the separate penalties for late submissions and late payments could rack up expensive penalties.

Keeping on top of penalty points accrued will be hard for some businesses

David Herd, group director, Champion Accountants

Aside from larger businesses with robust internal finance teams, very few VAT-registered companies will be aware of the reforms.

HMRC has attempted to simplify VAT penalties and payable fines by introducing a new points-based system which – in a nutshell – sees a business accrue penalty points based on late VAT filings and late VAT payments.

Previously, VAT penalties were charged through the surcharge regime, applying a percentage based penalty on the VAT amount due. Late filing or late payment of just one day could auto-accrue a large surcharge, especially if there had been several late returns in a row.

The new fixed £200 penalty should therefore be welcomed by most businesses and provides those businesses with large VAT liabilities some comfort in that being late won’t result in large fines. Yet though the fixed value penalty has simplified the amounts due, working out a business’s ‘compliance period’ still seems fairly complicated, and it’s likely that many businesses won’t keep on top of how many compliance points they have received.

Verdict: Although the new fixed £200 penalty should be welcomed by most businesses, many businesses won’t keep on top of the penalty points they’ve received.

Businesses struggling with cash flow issues could end up with multiple fines

Jessica Middleton, Founder, MPASUK.com

Do I believe that penalties should be generalised across businesses? No.

Yes, you will inevitably get some businesses that take the mick with late returns and payments, blanket fining people is a slippery slope.

The premise of the points-based system makes sense on one level: for each return you submit late or pay late, you receive a penalty point until you reach your penalty point threshold. Once reached, you receive a £200 fine plus an additional £200 fine for subsequent late submissions.

But on closer inspection, in businesses where cash flow is already tight or has been impacted cost-wise by the rising cost of living, the anxiety of already knowing you won’t be able to pay on time let alone face a penalty can be tough.

HMRC won’t let you set up concurrent payment plans, so if cash flow has been super tight and you’re on a payment plan for one return but cannot afford to pay the full amount of the next one, then the fines just keep on piling up. It’s a never-ending cycle.

The question needs to be asked, how can HMRC really help those businesses? HMRC needs to look at ways to help honest business owners catch up on VAT payments without the threat of penalties.

Verdict: The new penalty system could quickly overwhelm businesses impacted by the cost of living that just can’t afford to pay, and fines could just pile up.

Annie Makoff is a freelance journalist and editor.