The Government has published draft legislation confirming that it will introduce a new system of penalising taxpayers for late VAT payments, which will replace the current default surcharge regime. This will come into force for VAT periods beginning on or after 1 April 2020, and bring VAT broadly into line with the current rules for corporation tax and income tax.
‘Late payment interest’ will be charged to taxpayers when a payment of VAT is made to HMRC after its due date. The interest will be based on the amount of tax outstanding and the period of time that the tax goes unpaid. This will apply to late payments of VAT returns, payments on account and assessments.
In addition to late payment interest, overdue payments of VAT will also be liable to a two part ‘late payment penalty’:
- The first part of the penalty will be charged at a percentage of the outstanding tax and will apply if the taxpayer fails to make a VAT payment or enter a ‘time to pay’ agreement with HMRC within 15 days of the due date. If payment is made or time to pay is agreed 16 – 30 days after the due date, that penalty will be incurred at a reduced rate and, after 30 days, the penalty will apply at the full rate. The precise rate of the penalty and its potential reduction has not yet been confirmed but, during the consultation process, HMRC suggested 5% as a possible penalty rate and that the penalty might be halved if the outstanding VAT is settled in the 16-30 day period.
- If the VAT due remains unpaid after 30 days, a further element of the penalty will be charged from the due date until full payment is made or time to pay agreed with HMRC. This will be calculated in a similar way to interest but will be separate from and additional to late payment interest.
The taxpayer will have the right to appeal against either element of this penalty, which must be exercised within 30 days of receiving a penalty notice.
HMRC has also published a Technical Note on a separate ‘late submission penalty’ for VAT returns. Although the value of the penalty has not yet been specified, HMRC plans to base this on a points system, under which one penalty point is awarded for each failure to submit a return on time. Once a certain number of points have been accumulated (four in a year for those who submit VAT returns quarterly), the taxpayer is liable to a penalty. After a sustained period of good compliance (eg four timely submissions of quarterly VAT returns), the points total is reset to zero – provided all outstanding returns have been submitted. The Government expects that points will also expire after two years if the taxpayer has not exceeded the penalty threshold.
Points are awarded and penalties applied on a tax by tax basis (ie points incurred on other tax returns will not count towards a VAT return penalty). Taxpayers may request a review or appeal against points (on reasonable excuse grounds) at the time they are incurred as well as against any resultant penalties - HMRC expects this will be done via an online process. The Technical Note does not specify a start date for the late submission penalty, but it would seem logical that this would come into force in 2020 alongside the new ‘late payment interest’ sanctions. The Government says that it plans to eventually roll this regime out to other indirect taxes too.
Finally, the Government will abolish the current repayment supplement regime, which entitles the taxpayer to a 5% payment from HMRC if it takes more than 30 days to pay a refund claimed on a VAT return. Instead, taxpayers submitting repayment returns will be paid interest from the date of the receipt of the return to the date of payment by HMRC. However, this will not be payable for any period where:
- HMRC has made reasonable enquiries and a full and complete response has not been received, where HMRC needs to correct errors or omissions on the return
- Where previous returns are outstanding, or
- Where security has been requested but not provided.
End of the VAT default surcharge
This measure is part of a suite of proposals to replace the current default surcharge regime. HMRC has also consulted on a separate late submission penalty for VAT returns, but draft legislation on that proposal was not published on 6 July 2018.
Some details remain to be ironed out but, overall, most businesses will be glad to see the end of the current default surcharge regime, which can result in very large fines for those who submit and/or pay their VAT return just a few days late. While this is likely to remain a much litigated area, the new approach should at least result in more proportionate penalisation of late VAT returns and payments.