CH192010 - Penalty reform: penalties for failing to submit VAT returns by the due date from 1 January 2023: Introduction

NB: “These rules currently only apply to VAT for VAT periods starting on or after 1 January 2023. These rules will come into force for other tax regimes at a future date. You must check the date from which these rules apply for the tax or duty you are dealing with”

Section 116 and Schedule 24 to the Finance Act 2021 introduced new penalties for failure to submit returns by the due date. These penalties come into force for a specific tax regime on the day the Treasury appoints by regulations.

SI 2022/1278 appointed 1 January 2023 as the day the penalty regime will begin to apply to VAT in respect of returns for accounting periods starting on or after 1 January 2023.

This guidance therefore currently only applies to VAT. It will be updated when the penalties come into force for other tax regimes.

The VAT Default Surcharge regime will continue to apply for accounting periods starting on or before 31 December 2022, see VDSOG - VAT Default Surcharge Officer’s Guide

Finance Act 2021 also introduced

• new penalties for failure to pay tax which will apply first to VAT for periods starting on or after 1 January 2023, and
• new rules for late payment interest and repayment interest for VAT which will also apply to VAT registered businesses for periods starting on or after 1 January 2023.

For more information about those changes see CH193000 (LPP) and CH140000 (interest)

Overview

All VAT registered taxable persons are required by law to submit their VAT returns by the due date for the relevant accounting period.

For VAT, the returns are those required under Regulations 50 and 25(1) of the VAT Regulations 1995 SI 1995/2518.

The late submission penalties apply to VAT returns for a prescribed accounting period on/after 1 January 2023.

The late submission penalty regime is a points-based system which means that when a taxable person fails to submit a return, a nil return or repayment return, on or before the due date, they may be awarded a penalty point.

Returns are grouped for penalty purposes according to the frequency of the filing obligation.

The taxable person will become liable to a financial penalty of £200 if the number of points reaches a maximum amount which is based on the filing frequency for the relevant group of returns- see CH192270.

Once the maximum number of penalty points is reached, no further penalty points are awarded and instead the taxable person is liable to a £200 fixed financial penalty for that failure and each subsequent failure while the taxable person remains at the maximum.

Individual penalty points expire after 24 months unless the taxable person has reached the maximum number of penalty points for that group of returns – see CH192200.

All penalty points can be reset to zero after meeting two conditions which depends on the group of returns- see CH192210.

When a taxable person is awarded a penalty point or is assessed for a financial penalty, HMRC must notify that penalty point or financial penalty see CH192300

In many taxes, a taxable person can adjust the frequency of their filing obligations. The points model accommodates this flexibility without penalising those who need or want to change frequency. Where a person’s filing obligation frequency changes, there is a mechanism to adjust their points totals and reset compliance periods in a way which aims to provide neither advantage nor disadvantage to them, see CH192220.

A taxable person is not liable to a penalty point or financial penalty if they have a reasonable excuse for the failure and they submit the return without unreasonable delay after the period covered by the reasonable excuse ends – see CH192370 and HMRC guidance at CH160000.

A taxable person can request a review in response to the awarding of a penalty point and/or assessment of a financial penalty. A taxable person can also appeal to a Tribunal, with or without having had a review- for further guidance see CH192330. Please also see ARTG3000 for full guidance on reviews and appeals for indirect taxes.