Understanding Late VAT Returns Penalties: How to Avoid Fines and Stay Compliant in 2024

Understanding the New Penalties for Late VAT Returns and Payments

The rules governing penalties for late filing and payments of VAT (Value Added Tax) returns have changed. For VAT return periods starting on or after 1 January 2023, a new penalty regime has been introduced, separating penalties for late VAT submissions from those for late payments. If you’re a business owner or a VAT-registered individual, it’s crucial to understand these changes to avoid costly fines.

A Points-Based Penalty System for Late VAT Returns

The updated system for late VAT returns is now based on a points-based approach. Under this system, each time a VAT return is submitted late, the taxpayer is assigned a penalty point. Once the number of penalty points reaches a certain threshold, a fixed financial penalty of £200 is imposed, and the taxpayer is duly notified.

The threshold for accumulating penalty points varies depending on how frequently the VAT returns are required. For example:

• Quarterly VAT returns: The penalty threshold is set at 4 points.
• Monthly and annual returns: The thresholds differ, reflecting the submission frequency.

It’s important to note that if you consistently comply with VAT submission deadlines, the penalty points will eventually reset to zero. For quarterly returns, this reset requires a 12-month period of full compliance with VAT submission requirements.

Time Limits for Levying Penalty Points

There are specific time limits within which a penalty point must be applied. If a taxpayer misses a VAT submission deadline, the point must be levied within these set timeframes. This ensures a fair process, giving taxpayers clarity and certainty about potential penalties.

Late Payment Penalties Explained

In addition to penalties for late VAT submissions, there are also penalties for late payments. These penalties are designed to encourage timely payment of any VAT owed and are structured as follows:

• First Late Payment Penalty: If VAT remains unpaid 16 to 30 days after the due date, a first penalty of 2% of the outstanding tax amount will be applied.
• Second Late Payment Penalty: If the tax is still unpaid after 31 days, the penalty increases to 4% of any remaining unpaid tax.

These penalties are cumulative, meaning the longer the debt remains unpaid, the higher the total penalty amount becomes.

Late Payment Interest Charges

Beyond the fixed penalties for late payments, interest charges will also accrue on any overdue VAT amount. The late payment interest is calculated starting from the date the payment becomes overdue until it is fully settled. The rate of interest is set at the Bank of England’s base rate plus an additional 2.5%. This means that the longer you delay settling your VAT bill, the more interest you will accrue, increasing the overall cost.

How to Avoid Late Filing and Payment Penalties

To avoid these penalties, it’s essential to:

1. Stay Organised: Maintain a clear record of all VAT return deadlines and set reminders well in advance to ensure timely submission.
2. Regularly Review Your VAT Obligations: Understanding your VAT obligations, including the timing and amount due, is crucial to avoid penalties.
3. Seek Professional Advice: If you’re unsure about your VAT responsibilities or if you anticipate difficulties in meeting deadlines, seek advice from a qualified accountant or VAT specialist.
4. Consider Direct Debit Payments: Setting up a direct debit for your VAT payments can help ensure payments are made on time, reducing the risk of late payment penalties.

Conclusion

With the introduction of the new VAT penalty regime in 2023, it’s more important than ever to understand your VAT responsibilities and deadlines. If you want to understand more about IPA Group VAT services, we are on call away. By staying informed and organised, businesses and individuals can avoid the unnecessary costs associated with late submissions and payments. Remember, compliance not only helps in avoiding penalties but also ensures smoother financial operations and good standing with HMRC.