A whole new raft of penalties for VAT

As per the famous aphorism coined originally in French, businesses who are registered for VAT have been getting used to changes recently, with the introduction of MTD (Making Tax Digital) in April 2019 bringing yet more digital changes to their filing obligations with HMRC. However, one feature that will remain the same will be the ever-present threat of automated penalties for taxpayers not fulfilling their basic taxation obligations – filing and paying on time.

The next big change is due on 1 April 2022, when the old “Default Surcharge Regime” (DSR) will be replaced by a new late filing and late payment regime for VAT. HMRC has made an announcement about the planned legislative changes required to bring this into effect:-

Interest harmonisation and penalties for late payment and late submission - GOV.UK (www.gov.uk)

With even HMRC conceding that this represents a “significant change”, it is surprising that there is little publicity surrounding this new regime – particularly when knowledge of consequences is key in driving the compliant behaviour that is HMRC’s objective.

The first key change to note is that, contrary to the practical effect of the DSR, there will be now separate penalties for the separate obligations of a trader to (a) file on time and (b) pay on time. It has long been a peculiarity of the DSR that, so long as a trader pays the right amount of tax on time then there is no penalty consequence for not filing their return on time.

The new penalty for late submission of a VAT return

The next fundamental change is that it appears that the new late filing penalty will see the launch of the principle of the “penalty points” structure of penalty consequences, rather akin to endorsements on UK driving licenses following driving offences. The more serious or frequent the failure, the more the points will accumulate and then turn into financial penalties. In this respect the new regime will be similar to the DSR as only repeat offenders will be punished.

It is understood that senior HMRC management have often been frustrated in the past of the considerable operational impact of administering large volumes of comparatively small penalties. Not only were the penalty amounts thought not to be sufficient in helping to deter the wrong behaviours, they were also too small to merit effective collection action when left unpaid.

The new fixed penalty amount will be £200, which is double the current ITSA initial late filing penalty which it is expected to eventually replace in 2024. However, it will only be payable once a trader has accumulated enough points to be above the relevant threshold. That threshold varies accordingly to the frequency of the trader’s normal filing pattern:-

Annual              2 points

Quarterly          4 points

Monthly            5 points

Example 1

Trader A has an accounting period of 31 January / 30 April / 31 July / 30 October.

The filing dates are therefore 7 March / 7 June / 7 September / 7 December.

• Trader A files their returns on 10 March, 18 June, 25 September, 5 December and then 10 March.
• Penalty points are accumulated for each failure. The fourth point accumulates on 8 March.
• The penalty of £200 then becomes due.

The penalty points will then expire after a period of complete compliance has been reached. In the case of quarterly returns, this “penalty period” will be twelve months. In many respects, this feature is similar to the old penalty period of the DSR.

Example 2

Trader A continues trading from the example above. The “penalty period” starts and run until 7 March next year.

They file their returns as follows:- 6 June, 5 September, 5 December, 4 March.

• All filing obligations have been met on time in the penalty period.
• Accordingly, all points from Example 1 expire and Trader A has a “clean slate” in recognition of the improvement in behaviour.

Example 3

The facts are as Example 2, but Trader A misses the last obligation and files on 12 March.

• They are charged another fixed penalty of £200 for that failure.
• The penalty period will also start again, with a fresh period now set to expire on 7 March of the next year.

Some key areas are still not made clear in the announcement, such as whether there be a separate sanction for very late filing or non-filing. HMRC have left the door open for daily penalties; however, we are yet to see this confirmed or denied.

The new penalty for late payment of VAT

Rather strangely, the new late payment penalty is less akin to the DSR and rather more like the current ITSA late payment regime – to which it is understood the regime will also be aligned from 2024. For example, there is now no “penalty period” within which the penalty consequences of a further failure can escalate.

The announcement states that there will be two potential charges. The details of how those charges arise, however, are still not fully clear.

The first charge will be 4% of the outstanding amount as of 30 days from the payment date. However, the charge will be reduced to 2% for any payments made or where a Time To Pay arrangement is made within the preceding 14 days. This is presumably a feature to encourage taxpayers to get in touch before the 30 day penalty deadline.

If a taxpayer makes payment before the 15^th day, then the penalty is reduced to nil and the taxpayer will not incur a penalty. HMRC state that they expect that, in most cases, a 4% penalty will be due at day 30.

There is little detail about the second charge. However, the announcement states that it will arise on a daily basis based upon amounts outstanding, at an annual rate of 4%. This raises the prospect of an additional excess interest charge which may rise in line with Bank of England interest rate rises. The detail around this interaction with the standard interest rules is, however, not made clear.

Our understanding of this is as follows:-

Trader A submits their 30 April VAT return on time on 6 June. It states a liability of £5,000. There is no late filing penalty.

However, Trader A does not pay the £5,000 by the due date of 7 June. Therefore, penalties will arise as a result of the first charge in the following scenarios:-

 Practicalities

The changes to the legal framework of penalties will be matched by the ongoing changes to the HMRC IT systems. Mirroring the last tranche of traders being transferred from the legacy “VAT Mainframe” system, it is understood that these penalties will be administered by the relatively new ETMP (Enterprise Tax Management Platform) system.

This system already administers penalties such as the late payment penalty regime for PAYE and it is understood that much of the functionality will be duplicated within the new VAT penalty regime. HMRC have indicated that this system will host the future environment for all business taxes.

Unlike some other penalties, however, there is no suggestion that HMRC will risk assess these penalties so apply them to only the most serious and persistent offenders. The indications are that the system will generate penalties notices every time that it recognises a failure on an automated basis, although HMRC will wish to carefully consider the operational impact of generating such large volumes of penalties. It may be the case that the automated system is attractive in much the same way the DSR’s penalties were generated automatically.

So what can the trader do if they receive a penalty? Safeguards

It appears that many of the safeguards currently available to taxpayers will still be available to them under the new regime. For instance:-

1. Any failures that are the result of an accepted “reasonable excuse” will be waived.
2. All penalties will be subject to the right of an appeal to an independent tribunal.
3. Where taxpayers manage to agree a payment arrangement for unpaid tax in advance of the late payment penalty becoming due, then, so long as they keep to the terms of the arrangement, those penalties are waived.
4. HMRC will also have a discretionary power not to impose penalties where “appropriate” and in “special circumstances”. It is expected that this will operate similarly to the current provisions where HMRC may grant a “special reduction” in a particular case.
5. Where merited by the circumstances, HMRC may exercise its “care and management” powers under S5 CRCA 2005 to effectively cancel penalties across a whole segment of the taxpayer population. This allows the department an operational easement to not issue large volumes of penalties that will probably be successfully challenged on the basis of the impact of local or UK-wide events (such as natural disasters or COVID).

The future

We all know that change is the only permanent feature of the tax landscape. Taxpayers, advisers and HMRC staff alike will have to get up to speed with how the new rules operate and quickly, particularly since they appear to be aligned with the future ITSA penalty regimes.

Faced with the onset of a mass of new rules for penalties and the prospect of automated compliance, taxpayers who also have taxation responsibilities for RTI / PAYE will have a familiar feeling – the French have coined a phrase for that too: “Déjà vu”.

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