The VAT default surcharge system, which applies to late filing and late payment, doesn’t fit with the structure of penalties for other taxes. HMRC has been planning to reform VAT penalties for some years, and the shake-up in VAT reporting under MTD seems an ideal time to bring in this change.
For VAT periods beginning on and after 1 April 2022 the taxpayer will only be subject to a financial penalty for late filing if they have accrued sufficient points for being tardy with a certain number of returns. The points threshold depends on the submission frequency of the return:
| Submission frequency | Penalty threshold | Period of compliance |
|---|---|---|
| Annual | 2 Points | 24 Months |
| Quarterly | 4 Points | 12 Months |
| Monthly | 5 Points | 6 Months |
Where the business is submitting quarterly VAT returns, it can submit up to three late VAT returns with no penalty, but on the fourth late submission an automatic financial penalty of £200 is triggered. Also every late submission after that threshold has been breached will trigger another £200 fine, but those additional penalties will not add points to the points slate.
Each point will expire after two years, and this lifetime clock starts running from the month after the month in which the late filing occurred, not the month when HMRC tell the taxpayer the point has been levied. HMRC has 11 weeks to levy points after the quarterly filing deadline is missed, 48 weeks for annual filings, and just two weeks to monthly filings.
The points slate can only be wiped clean when the taxpayer achieves both of:
- No late submissions for a period of compliance; and
- All returns filed for the previous 24 months, even if they have been filed late.
The period of compliance varies with the submission frequency of the return as shown in the table above.
Where the VAT return is a one-off form to report a particular transaction, this will not accrue a late-filing point.
All points and penalties can be appealed.
This system of “points means penalties” for late filing will also apply to MTD ITSA submissions from 6 April 2024.
We have just over two years to get used to this new system before it expands to cover the majority of our clients under MTD. Clients who fail to file quarterly under MTD ITSA will soon be hit with high penalties.
Written by the Tax Advice Network