The current VAT penalty regime was due to be replaced from April 2022, with a move to a points-based late filing regime and the application of late payment penalties being proposed, however these changes have been delayed and are now due to implemented with respect to accounting periods beginning on or after 1 January 2023. This means they will no longer come into effect at the same time as the extension of MTD to all VAT registered traders, preventing businesses from having to manage multiple changes at the same time.

It is important for taxable businesses to familiarise themselves with the new rules ahead of their implementation to avoid falling foul of the new regime and incurring unexpected financial penalties.

Under the current rules, errors relating to the late submission of a VAT return, or late payment of VAT arising from a return, are subject to the default surcharge regime. No penalty is due when a business first ‘defaults’ however a 12-month surcharge period begins with surcharges of increasing value due in the event of any further defaults in this period, which automatically extends by a further 12 months should errors be made. Penalties of this nature can be mitigated subject to the business having a reasonable excuse for defaulting.

Furthermore, penalties for errors that do not fall under the scope of the default surcharge regime, i.e. those relating to an under- or over assessment of VAT are calculated in accordance with several factors including whether the disclosure of such errors are prompted or unprompted – in addition to the ‘quality’ of any disclosure made. A further consideration is whether the behaviour leading to the error is careless, where penalties can range from 0% to 30% of the VAT owed, or deliberate where penalties can range from 20% to 100%.

In the event you or client have identified an error within the businesses VAT accounting which may be subject to penalties and you are unsure of how best to approach this matter, or if HMRC have levied a penalty in relation to your business that you feel is unjust, please call our free VAT helpline and speak to one of our consultants today.

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