The VAT default surcharge system can create some very unfair charges for late payment where the delay in getting the money to HMRC is as little as one day. The new late payment rules may be fairer, but they could hit small businesses much harder as there will be no easement where turnover is low.
- All businesses will get a 15-day grace period to pay their VAT bill. If the VAT arrives with HMRC within 15 days there is no penalty at all.
- VAT unpaid after day 15 triggers an automatic penalty of 2% of the unpaid amount – no warning notices, no default periods, a flat 2% charge.
- VAT unpaid after day 30 triggers another automatic penalty made up of the over 15-day 2% penalty plus an over 30-day 2% penalty, which together amount to 4% of the late paid tax.
- Any VAT still outstanding at day 31 creates a daily penalty that increases at 4% per annum of the outstanding debt.
HMRC is planning to beef-up its automatic Time To Pay (TTP) offering. If a TTP agreement is reached the clock stops at the rate of penalty in force when the TTP agreement starts.
For example if a TTP agreement is reached within the first 15 days, no penalty is levied at all. Also for the first 12 months of the new regime taxpayers will have up to 30 days to agree a TTP with HMRC, and accrue no penalties.
If the taxpayer has a reasonable excuse for late payment, they will be able to communicate this excuse to HMRC (presumably through the MTD compatible software), and the penalty will not be assessed. All penalties can be appealed.
In addition to the late payment penalty the taxpayer will also be charged interest on any tax paid late at the rate of 2.5% plus the Bank of England base rate. This is in line with other taxes.
This new late payment regime will apply to income tax payable under self assessment form 6 April 2024, for taxpayers within MTD, and from 6 April 2025 for all other income taxpayers who are in self-assessment.
Written by the Tax Advice Network