Tax processes for business explained

February 2024

Karen Groves looks at imminent changes to HMRC’s filing and penalties regime that will affect AAT exam sitters.

The Finance Act 2021 assessments will be replaced with the Finance Act 2023, starting on the 29 January 2024. So what is changing between the Finance Acts? We will look at the consequences of late filing of VAT returns, late payment and interest charges. HMRC introduced a penalty points system in January 2023, replacing the default surcharge system, which is applied for the late filing of VAT returns and payments. The update aims to simplify and separate penalties and interest. A penalty point is issued every time a VAT return is submitted late and when the total points reach a set level, a penalty is applied. For those of you old enough to remember a certain television show, in this case points do not make prizes!

The points threshold will depend on the frequency of VAT returns the taxpayer must submit, as follows:

Annually = 2 points threshold
Quarterly = 4 points threshold

At the point the taxpayer reaches the threshold, a £200 penalty is charged and will apply for all subsequent VAT returns that are filed late.

HMRC may choose not to apply point(s) if the taxpayer has a reasonable excuse, but this will depend on individual circumstances.

The individual points will expire after two years as long as the taxpayer hasn’t reached the penalty threshold. If the taxpayer has reached the penalty threshold, the points will only reset to zero as follows:

Quarterly returns – the next 12 months must be submitted on time
Annual returns – the next 2 years must be submitted on time

Note: All returns for the past two years mustbe submitted for both of the above, even if submitted late.

What happens if you pay late?

If a taxpayer, in addition to filing a late VAT return, also sends a late payment after 1 January 2023, there will be a further penalty. The penalty will be based on a percentage of the outstanding VAT due for payment. The initial penalty will be applied if the payment is more than 15 days overdue and a second penalty will be applied when the payment is more than 30 days overdue.

It is very important that you familiarise yourself with the AAT Reference Material that you will have access to during your assessment, which covers the penalties levied.

If the taxpayer has a reasonable excuse for paying late, which HMRC are satisfied with, then no penalty will be assessed. A lack of funds to pay would not be a reasonable excuse.

If a taxpayer is having financial difficulties, then a ‘time to pay’ arrangement can be requested from HMRC. This will enable the taxpayer to have a personalised payment plan and prevent further penalties being levied if the taxpayer keeps to the agreement.

Interest

From 1 January 2023, HMRC will charge late payment interest from the first day that the payment is due, until it is paid. The interest is charged at 2.5% above the Bank of England base rate, so if the base rate was 4%, interest would be charged at 6.5%.

The interest is charged on both outstanding VAT amounts and late payment penalties not paid, as penalties are due for payment within 30 days. The interest will continue to be charged on amounts included in a time to pay agreement.

Now test your understanding!

Question 1

A business has not submitted its VAT return for the quarter ended 30 June 2024. This is the fourth late return. The business then files the next quarter’s VAT return on time. A £200 penalty will be charged for the quarter ended 30 June 2024, but no penalty is charged for the quarter ended 30 September 2024.

• True
• False

Question 2

A VAT-registered business has not paid the VAT due of £3,945 until 5 July 2024 for the quarter ended 30th April 2024. Calculate the interest charged if the Bank of England base rate is 6%.

• Karen Groves is an AAT tutor and AAT Faculty Director at e-Careers