A new points-based penalty applies to late VAT returns for VAT periods beginning on or after 1 January 2023. The first monthly return to be affected was the one due by 7 March 2023, with the first affected quarterly return due 7 May 2023.

This new returns penalty regime joins the completely separate new penalties for late payments in replacing the old system of default surcharges.

The points-based penalty revolves around a points threshold and a compliance period. These vary according to the length of the VAT period:

Points threshold

All traders start on zero points, including those who are on a default surcharge. One penalty point is then charged for each late VAT return, even for returns with a nil liability or where a repayment is due.

• A £200 penalty is charged once the points threshold is reached.
• Subsequent late VAT returns after the threshold is reached also incur the £200 penalty.
• No penalty point is charged where a first or final VAT return is late.

Compliance period

If the penalty threshold has not been reached, points will expire after two years. However, once the threshold is reached, a trader has to submit returns on time throughout the compliance period for their points total to be reset back to zero.

For example, if a trader has submitted four consecutive monthly VAT returns late, then the £200 penalty will be charged for any subsequent late returns (the points threshold being reached). To reset to zero points, the trader must submit six consecutive returns on time.

The new regime for late returns does not penalise those who occasionally file late, but consistently late filers may find their points tally difficult to significantly reduce without clear-sighted guidance and planning.

HMRC guidance on the new penalty points system can be found here.

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The system of postponed VAT accounting for import VAT has been up and running since the start of the year, but there is still a lot of confusion. You may be experiencing some of these common problems.

Monthly statements

Some importers have had difficulty accessing their monthly import VAT statements. The trick is to start from the link here, rather than trying to directly log on via your Government Gateway.

Remember that import VAT statements are only available online for six months from the date of publication, so they should be downloaded and stored securely.

No feedback

Despite importing goods, you might not have paid any import VAT or received any paperwork. What has most likely occurred is the freight agent has defaulted to postponed VAT accounting without asking you. As a matter of urgency, you therefore need to enrol for the customs declaration service given the six-month statement availability. You can then declare, and normally reclaim, the import VAT on your VAT returns.

No import VAT shown

The lack of a VAT figure on an invoice for imported goods can be confusing, and different freight agents may well adopt different approaches.

Import VAT will generally be dealt with by VAT return entries under postponed VAT accounting, as explained above. However, the freight agent may have paid the VAT to release the goods, and you will then receive a form C79 from HMRC. This document is used to reclaim the VAT paid.

Form C79 not received

If you have not received a form C79 from HMRC, it may be because:

• The form is sent by post, so it might have got lost; or
• The freight agent may have defaulted to postponed VAT accounting without telling you.

Accounting software

Finally, there is also the common problem of accounting for the import VAT. The correct VAT coding will be particularly important for partially exempt businesses because they may not be able to recover all of the VAT. If in doubt, the best advice is to get help from your software provider; each accounting package may well have a different approach to dealing with import VAT.

You can check when it is possible to use postponed VAT accounting here and of course we’re here to help.

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The existing penalty regime for VAT returns has the advantage of simplicity, but it’s something of a blunt instrument. The new system coming in for return periods beginning on or after 1 April 2022 will be fairer, but some businesses will find themselves caught up in a complex web of escalating penalties.

The penalty scheme will be clearly divided, with one regime for late payments and another for late VAT return submissions.

Late payments

Unlike the current system of default surcharges, each late payment will be considered separately, with the following penalties charged unless there is reasonable excuse:

A business can avoid any further penalties accruing by entering into a time to pay arrangement with HMRC. For example, penalties are avoided if a business approaches HMRC when payments are already 12 days late.

For the first year, HMRC will take a light-touch approach to the initial 2% late payment penalty.

Regardless of whether any late payment penalties are charged, interest will be incurred from the due date until payment is made. A time to pay arrangement will not stop interest accruing.

Late submissions

Under a points-based system, a business will incur a penalty point for each late VAT return Businesses that file quarterly will be charged a £200 penalty when they reach a penalty threshold of four points.

• Subsequent late VAT returns will also incur a £200 penalty.
• Points expire after two years, but not once the penalty threshold is reached.
• Once the penalty threshold is reached, a business filing quarterly will have to submit returns on time for twelve months for their points total to be reset to zero.

More detail is available on both late penalties and interest and late submissions from HMRC.

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