Changes to the VAT Penalty System in 2023
Situations often arise where we are unable to hit payment deadlines, whether human error, or circumstances conspiring unfavourably, it happens. So, it’s good to see HMRC taking a positive stance in this regard, in its latest revision of the VAT penalty system. In this article, we’ll review the changes to the VAT system you can expect in 2023.
As of January 1 the default VAT penalty system has been replaced by a scheme that on the face of it seems to be less punitive for the occasional late payment or submission. The new system treats late submissions and payments separately. It also calculates interest on late payments differently too.
Period of familiarisation
While the new system is already in operation, HMRC has said that it will allow a period of ‘familiarisation’, to allow businesses to adjust. If your business misses a payment deadline, so long as the payment is made within 30 days, or if you have a ‘Time to Pay’ agreement in place, no penalty will be levied. This familiarisation period extends to December 31 2023.
How penalties are applied
The penalty system applies in two ways:
- Late VAT submissions
- Late payments
A new development is that late submissions for zero or even repayment returns can incur penalties under the new system.
One of the likely reasons for the new system is to help HMRC reduce the administrative overheads associated with chasing and processing late filings.
A new points system for late submissions
The new points system applies to VAT submission deadlines. It adopts a scheme similar to a driving licence. The more infractions a VAT payer racks up, the more points you get. Each time you miss a submission deadline, 1 point is added. The threshold at which a penalty is applied depends upon the filing submission period. These thresholds are given as:
- Annual – 2 points
- Quarterly – 4 points
- Monthly – 5 points
If you hit your threshold, you’ll incur a penalty of £200. If you continue to miss deadlines, you’ll continue to receive £200 penalties.
You won’t incur a penalty if:
- Your business is newly VAT registered and is your first VAT return
- You have cancelled your VAT registration and this is your business’s final VAT return.
- Single case VAT returns covering periods of a month, quarter or a year.
Can a business clear its accrued penalty points?
Driving licence points usually expire automatically after 4 years, not so with VAT penalty points.
For penalty points under the VAT system to expire, you will have to meet a test of good compliance. The period of time this applies for depends upon your submission period:
- Annual submissions: 24 months
- Quarterly submissions: 12 months
- Monthly submissions: 6 months
More information about the penalty points system can be found on the Government’s VAT site here.
Penalties for late payment
The new system aggressively targets late payers by introducing a two stage system that uses fixed penalties and then daily penalty charges. If your business has not paid its VAT bill and does not have a ‘Time to Pay’ agreement in place, it’s going to get expensive quickly.
Here’s a summary of how it works:
Up to 15 days overdue
The good news is the system does allow for circumstances where you may encounter some unavoidable delays in submission. So, if you have a problem, talk to HMRC as you won’t be charged a penalty if you pay the VAT you owe in full or agree to a payment plan on or between days 1 and 15.
Between 16 and 30 days overdue
If you are late in submission, your first penalty will be calculated at 2 per cent on the VAT you owe at day 15, IF you pay in full or agree a payment plan on or between days 16 and 30.
31 days or more overdue
For circumstances where your submission is 31 or more days late, then your first penalty will be calculated at a rate of 2 per cent on the VAT you owe at day 15 plus 2 percent on the VAT you owe at day 30.
As a further inducement to pay on time, HMRC will levy a second penalty which is calculated at a daily rate of 4 per cent for the duration of the outstanding VAT balance. This is calculated once the outstanding balance is paid in full or a payment plan is agreed.
Don’t forget about interest charges
Receiving a 2% penalty on late payments is only part of the overall costs you’ll incur. HMRC will continue to charge interest on late payments at a rate of 2.5% above the BOE base rate. This is even the case if you have an agreed ‘Time to Pay’ arrangement.
All is not equal under the sun where VAT repayments are concerned though. HMRC will only pay interest at a BOE rate -1% and a minimum rate of 0.5%! It’s probably best to ensure you get your payments correct.
Right to challenge
HMRC VAT right to challenge policy is a policy that allows taxpayers to appeal against HMRC tax decisions. This remains the same under the new scheme in 2023.
It is important for taxpayers to know their rights when it comes to challenging HMRC decisions, as this can help them ensure that they are not paying more than they should be.
Under the policy, taxpayers have the right to request a review of any HMRC decision within 30 days of receiving the decision letter. During this review process, HMRC will consider all relevant information and evidence provided by the taxpayer and make a new decision on the matter. This new decision may result in an increase or decrease in taxes owed, depending on the circumstances.
Taxpayers also have the option of appealing against HMRC decisions in certain cases. This involves submitting an appeal to an independent tribunal which will review all relevant evidence and decide whether or not HMRC’s original decision was correct.
Ultimately, understanding your rights when it comes to challenging HMRC decisions is essential for ensuring you are not paying more than you should be.
How HMRC can use its powers to enforce payment
- HM Revenue & Customs (HMRC) has a number of powers available to them which they can use to enforce payment and collect any amount outstanding. These include:
- Taking legal action, including issuing court summonses or seeking orders from magistrates’ courts.
- Making deductions from a person’s salary or pension payments.
- Placing a restriction on the bank accounts of individuals or businesses, preventing them from making any further transactions until their debt is paid off.
- Using third party debt collectors to chase up outstanding payments.
- Using bailiffs and seizing goods in order to cover the cost of unpaid VAT.
In extreme cases, HMRC may even take criminal action against someone who has deliberately evaded payment of their taxes, leading to potential fines and/or imprisonment. Therefore, it is important for businesses to ensure they remain compliant with all applicable legislation surrounding their VAT payments and make sure that all amounts due are paid on time in order to avoid any of these serious consequences.
Why it makes sense allowing a VAT professional manage your VAT submissions
VAT for all but the smallest VAT registered companies can be a complex affair where mistakes can easily be made. TaxAgility are experts in VAT and can remove the burdens of managing and calculating your VAT liabilities from your daily business management routine. We’ll ensure your VAT returns are accurate and make sure they are filed on time.
If you’d like to simplify your VAT management, call TaxAgility today on 020 8108 0090.
How to mitigate the impact of inflation on your business
Inflation is a major factor that entrepreneurs and small business owners must take into consideration when crafting their business plans and setting prices. With careful planning and adaptation, businesses of all sizes can weather the effects of rising prices and stay competitive in today’s economy. Inflation affects many areas of businesses, such as pricing strategies, supply chain costs and marketing. It is important to assess the effects of inflation on a regular basis in order to remain profitable and successful. With proper management and strategic decision-making, small business owners can successfully navigate through periods of rising prices. In this article, we take a look at how inflation affects businesses and what business owners and managers can do about it.
What is inflation and how does it impact businesses?
Inflation is an economic phenomenon that results in a general increase in prices over a period of time. It can have a significant impact on businesses as it affects the cost of production and the revenue generated. When inflation increases, businesses must pay more for materials, labour, and other costs associated with producing goods and services. This can lead to higher prices for consumers, reduced profit margins, and even layoffs if companies are unable to pass those additional costs onto their customers. Additionally, rising inflation levels may also cause people to reduce spending due to decreased purchasing power caused by higher prices. This can further reduce demand for products and services leading to further financial losses for businesses.
What are the different types of inflation?
Inflation is typically divided into three main categories:
- Demand-pull inflation
- Cost-push inflation, and;
- Built-in inflation.
Demand-pull inflation occurs when consumer demand for goods and services increases faster than the economy can produce them. This causes prices to rise as businesses try to keep up with consumer spending, leading to an overall increase in the general price level.
Cost-push inflation happens when the costs of production increase without a corresponding increase in consumer demand. Some examples include higher costs of labour, raw materials, or energy needed to produce goods and services. When these costs go up, businesses will often pass those added expenses onto customers by increasing their prices—which raises the general price level across the economy.
Built-in inflation is a type of inflation that tends to happen over time due to the natural expansion of an economy. This type of inflation is usually seen in developing countries, where economic growth has led to a surge in demand for goods and services, pushing up prices as the country’s ability to produce them struggles to keep up with demand.
Inflation can also be categorised based on its speed or rate at which it occurs. Hyperinflation is a type of rapid, out-of-control inflation that typically happens when too much money is printed without enough real resources or assets backing it. This leads to an increase in money supply, which causes prices for goods and services to skyrocket quickly. By contrast, mild or moderate inflation is a slower rate of inflation that does not cause dramatic fluctuations in the general price level.
Overall, different types of inflation can have a huge impact on an economy, so it’s important to understand each type and how they are related. By recognising the various causes of inflation, governments and businesses can be better prepared to respond appropriately and reduce its negative effects.
How can a business protect itself from the effects of inflation?
One way businesses can protect themselves from inflation is by budgeting for it in advance. By staying abreast of current financial trends, business owners can plan ahead for any increases in the cost of goods or services due to inflation. This requires an understanding of the current market conditions, so business owners should keep a close eye on economic indicators such as the Consumer Price Index (CPI).
Businesses can also adjust their pricing to account for inflation. This may mean increasing prices in order to remain profitable, or it could involve finding ways to cut costs without sacrificing quality or customer satisfaction. Business owners should also look into hedging techniques such as futures contracts, options trading, and other methods of protecting against currency fluctuations due to inflation.
Finally, businesses need to be aware that inflation can affect the value of their investments and should monitor their portfolios to ensure they are not exposed to excessive risks. By taking proactive steps to protect against inflation, businesses can remain financially secure despite economic uncertainty.
What are some strategies for reducing the impact of inflation on a business?
One strategy for reducing the impact of inflation on a business is to increase operational efficiency. This is an area TaxAgility can assist with. We can help businesses review their operating costs and identify areas where they can improve efficiency, reduce waste, and save money. Additionally, businesses should look for opportunities to diversify their operations or enter new markets that may be less sensitive to inflationary pressures.
Businesses should also consider hedging strategies when dealing with inflation. Hedging involves taking measures to limit losses due to price fluctuations in commodities or currency exchange rates by investing in derivatives or forward contracts. This allows businesses to protect themselves from spikes in prices due to inflation and ensure that their operations remain profitable even amid unpredictable economic conditions.
In addition, businesses should consider diversifying investments by investing in a variety of different asset classes such as stocks, bonds and commodities. Diversification helps protect businesses from the effects of market volatility and can help ensure the long-term financial stability of a business even amid periods of high inflation.
Finally, businesses should seek out financing sources that offer fixed rates of interest. This will allow them to protect their profits from the effects of inflation and reduce the overall cost of debt financing.
These are just a few strategies for reducing the impact of inflation on a business. Business owners and executives should work with their financial advisors to identify which tactics might be most beneficial for their particular operations. By taking proactive steps to manage inflation risk, businesses can protect themselves against unexpected changes in prices and ensure long-term profitability.
How can businesses stay ahead of the curve when it comes to inflation?
In short, planning, foresight and common sense. By taking a proactive approach to inflationary pressures, businesses can ensure that they are well-prepared for any possible changes in the economy. They should be prepared for various scenarios and have contingency plans in place to address them. This includes developing the strategies mentioned above for hedging currency fluctuations or investing in different asset classes that can provide some protection from inflationary pressures. Businesses should also consider ways to reduce their operational costs, such as utilising energy efficiency measures or outsourcing services that would otherwise be costly in house. Taking these steps can help businesses stay afloat during periods of economic volatility caused by inflation and remain competitive in the long run.
How TaxAgility can help your business fight inflation
At TaxAgility, we don’t just provide an accounting service, we’re an extension of your financial team. We are here to help you identify the ways best suited to your unique business to fight the impact of inflation. We can help you do this by ensuring you maintain proper up to date management accounting information which allows you day-by-day to track income and expenses and the impact of rising costs on profit margins and cash flow.
We’re here to assist and advise as problems and opportunities arise. Call us today to discuss how we can help you keep a lid on the inflation’s impact on your business. Call today on: 020 8108 0090.
Note: This article is not intended to provide financial advice or guidance, it is for interest only.