New penalty rules
New penalties have been introduced for the late filing or payment of VAT. They apply to VAT accounting periods beginning on or after 1 January 2023. Whilst these may appear to be more stringent than previous, they do make allowance for the occasional missed deadline or late payment. The penalties are targeted at those who regularly miss the deadlines.
Late filing of VAT return
The new regime for late submission operates on a points-based system.
Each VAT return submitted late, including nil and repayment returns, will receive one late submission penalty point. For quarterly returns the penalty points threshold is 4 and for monthly returns it is 5. Once the threshold has been reached a penalty will be charged of £200, so for quarterly returns this will be on the fourth late submission and every late one submitted thereafter.
To reset the points to zero, a period of compliance must be completed. This is 12 months for quarterly VAT returns (6 months for monthly returns). For quarterly returns this means that all returns must be filed on time for at least 12 months. It is also a requirement that all returns due for the previous 24 months must have been submitted to HMRC.
Late payment of VAT due
A separate penalty will be charged if VAT owed to HMRC is paid late. The amount of the penalty depends on how late the payment is. Nothing is charged if payment is made within 15 days of the due date, which offers some useful flexibility should you find your business is struggling with cash flow one quarter.
If payment is made between 16 and 30 days of the due date, a penalty equal to 2% of the VAT owing at day 15 is charged.
If payment is 31 days or more overdue, the penalty will be 2% of the VAT owing on day 15 plus 2% of the VAT owing on day 30, meaning that 4% is charged on day 31.
From day 31, an additional penalty is charged either at the time the balance is cleared, or when a time to pay arrangement is agreed (assuming this is not in place by day 30). This is calculated at a daily rate of 4% a year for the duration of the debt.
Note that penalties may be avoided by speaking to HMRC and arranging a time to pay agreement. Ideally this should be done within 15 days of the payment being due. HMRC Business Payment Support
To allow traders time to become familiar with the new rules, late payment penalties will not be charged during the first year (1 January 2023 to 31 December 2023) if payment is made in full within 30 days of the due date.
Late payment interest
Aside from the above penalties, interest will be charged on late paid VAT from the due date until the date payment is made in full, even when a time to pay arrangement has been agreed. Late payment interest is charged at a rate equal to the Bank of England bank base rate plus 2.5%.
Cash accounting scheme
If your estimated turnover in the next 12 months is less than £1,350,000 a year, you can opt to use the cash accounting scheme. You do not need to obtain permission from HMRC to do so or fill in any forms. You can start using the scheme from the beginning of any VAT period.
Cash accounting is designed to improve the cashflow for small businesses. It shifts the tax point from invoice date to payment date for both purchases and sales. This means that you do not have to pay the VAT over to HMRC before you have been paid, improving cashflow and giving built-in bad debt relief.
You might want to consider this if your clients regularly pay you late or if you are struggling with cashflow. However, note that the same principle applies to purchase invoices – you cannot reclaim VAT on purchases that you have not yet paid for, so it may not be suitable if you have a significant level of costs.
You must leave the scheme if your annual taxable turnover exceeds £1,600,000.
If you wish to use this scheme, please talk to us.
VAT on services purchased from suppliers based outside the UK
Such services may include:
- e-books and other digitised documents, for example, PDF files and online magazines
- website supply or web hosting services
- distance maintenance of programmes and equipment
- supplies of software and software updates
- advertising space on a website
If you are using the Standard Rate VAT Scheme, it is important you only recover VAT where it has been charged by a UK supplier. Some invoices that cause problems are those issued by companies where the supplier is based outside the UK, often in Ireland or Luxembourg. Examples include Microsoft, LinkedIn, Google AdWords, Adobe and Zoom. If you are VAT registered, these companies should not have charged you any VAT. If they have charged VAT, whether this appears to be UK VAT or local VAT, you cannot recover it because it will either have been charged in error or will be local (non-UK) VAT.
The general reason VAT is charged is because the company assumes you are a consumer – a private individual rather than a business. If you notify the supplier that you are a UK registered business, and supply your VAT number, then no VAT should be charged. This is worth doing whether you are using the Standard Rate Scheme or Flat Rate Scheme, because the cost to your business will be less.
Here are some links to information on entering the details required for some of the companies mentioned, which you may find useful:
Once the company has stopped charging VAT you need to account for the purchase under the reverse charge mechanism. Any VAT that has been charged incorrectly to date cannot be recovered. The reverse charge applies if your supplier belongs outside the UK even if they have a UK VAT registration number.
VAT on services provided to a business based outside the UK
If you are invoicing a client based outside the UK for whom you are performing all your work (rather than, for example, taking instructions from a branch based in the UK), then generally the supply will be outside the scope of UK VAT, and you would not charge VAT on invoices to that client. This means that you should mark on your sales invoice that the reverse charge mechanism has been applied. Note that HMRC require you to obtain evidence that the client is a business and not a private individual; obtaining their VAT registration number is one way of doing this, but other commercial documents are acceptable.