Banner & Associates

Changes to VAT penalties and interest from 01 January 2023

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The way HMRC calculates interest on late VAT payments and repayments of VAT has also changed for VAT periods starting on or after 1 January 2023.

What will happen if you submit a VAT return late?

For VAT periods starting on or after 1 January 2023, penalties for submitting VAT returns late will work on a points-based system. One penalty point will be given for each VAT return submitted late.

If you reach your points threshold, you will have to pay a fixed £200 penalty. You will also have to pay another £200 penalty, each time you submit your VAT return late while you’re at the threshold. Your points threshold will depend on how often you need to submit VAT return.

What will happen if you do not pay your VAT on time

If your payment is more than 15 days overdue, you’ll have to pay a first late payment penalty. If your payment is more than 30 days overdue, you’ll also have to pay a second late payment penalty.

You’ll also be charged late payment interest from the day after your VAT is due to the day you pay in full. Interest will be calculated at the Bank of England base rate plus 2.5%. As at this date interest would be charged at 6.5% (4% base plus 2.5%).

Support for 2023 (1st year of new VAT Penalty Regime)

To help you get used to the new penalty system, HMRC will not charge a first late payment penalty on VAT payments due on or before 31 December 2023, if you either:

  • Pay in full within 30 days of your payment due date
  • Ask for payment plan within 30 days of your payment due date and HMRC agree to it

If your payment is 31 days or more overdue, you will have to pay a first and second payment penalty.

Mini Budget 2022/Fiscal Event – Key Points

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Newly appointed Chancellor of the Exchequer, Kwasi Kwarteng, has just delivered a speech (fiscal event speech as the government is calling it) and it’s packed with implications for individuals, small businesses, contractors, and those in property. We have highlighted below some of the key announcements that would affect you. 

Income tax & National Insurance

The announcements were.

  • There will be a cut in income tax to 19% from April 2023
  • 45% higher rate of income tax is abolished from April 2023
  • National Insurance and dividend tax increases of 1.25% will be reversed from 6 November 2022

What does this mean? Well, if you take dividend then the basic rate will revert to 7.5%  from 8.75% and the higher rate to 32.5% from 33.75% and from April 2023 those will be the only two rates for dividend tax; 7.5% and 32.5%. 

IR35 – back to the old determination rules

The planned changes to how IR35 operates, moving the compliance requirements from the contractor to the client for large and medium-sized private sector businesses who engage freelancers has been scrapped and will revert to contractors determining their employment status.

This is very welcomed news to the freelance and contractor population as many were wrongly determined to be inside IR35 and thus paying huge amounts of tax (unfairly in my opinion).   

However, a cautionary note here to still determine your IR35 status before any contract and to consider getting contract assessments and insurance. HMRC will no doubt continue to target personal service companies for investigations. Forewarned is forearmed.

Corporation Tax rate holds steady at 19%

The rate at which limited companies pay Corporation Tax was originally planned to increase from 19% to 25% from April 2023 but these plans have been axed. The rate of Corporation Tax will now remain at 19%.

Other notable business announcements

The annual investment allowance for businesses will be permanently set at its highest level of £1 million from April 1 next year. This will give 100 per cent tax relief to businesses on their plant and machinery investments up to the level of £1 million.

The company share option plan limit that allows businesses to offer employees share options is being raised from £30,000 to £60,000.

Tax cuts and liberalised planning rules to be offered to release land for housing and commercial use. 

Further announcements were made on big infrastructure projects, investments zones, strike actions by unions and others which we have not gone into here. 

Stamp duty

The threshold for stamp duty on house purchases has been raised from £125,000 to £250,000 from tonight (23 September 2022). For first-time buyers it will rise from a £300,000 threshold to £425,000. The value of the property on which first-time buyers can claim relief has been raised from £500,000 to £625,000.

Energy bills

There will be a freeze on Energy bills for households. This has been capped at an average of £2,500 a year for two years, a £1,000 saving at present energy prices. Bills have also been capped for six months for businesses, charities, and public sector organisations such as schools and hospitals from October 22.

Shopping and alcohol

  • VAT-free shopping for overseas visitors and a digital VAT-free shopping scheme will be introduced for international tourists outside of airports
  • Planned increases in the duties on beer, for cider, for wine, and for spirits cancelled. Enjoy 😊

New VAT penalty regime and other VAT news

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Now we all know that we live in a world of deadlines and however much we might relent against it, we can’t really! So let’s get on with hitting them. If your company is VAT registered, then you must be registered for MTD and filing through this mechanism. If you would like some guidance on this then please contact our VAT guru, Jojo.  

With deadlines being so important and the human condition something preventing them from being met, HMRC have introduced a new VAT penalty regime. Now I think it might be best for all to understand the current penalty regime for VAT first. There are two seperate elements to the current regime; surcharges and penalties. These would apply if your VAT return is not submitted to HMRC by the deadline (one month + 7 days after the end of your VAT quarter) or if full payment is not received by HMRC by the deadline (one month + 7 days after the end of your VAT quarter).

SURCHARGE 

You may enter a 12 month surcharge period if you default. The surcharge is a percentage of the VAT outstanding on the due date for the quarter that is in default and is in addition to the VAT due. The table below shows the default surcharge percentages. There is no surcharge on the first default

Defaults within 12 monthsSurcharge if annual turnover is less than £150,000Surcharge if annual turnover is £150,000 or more
2ndNo surcharge2% (no surcharge if this is less than £400)
3rd2% (no surcharge if this is less than £400)5% (no surcharge if this is less than £400)
4th5% (no surcharge if this is less than £400)10% or £30 (whichever is more)
5th10% or £30 (whichever is more)15% or £30 (whichever is more)
6 or more15% or £30 (whichever is more)15% or £30 (whichever is more)

PENALTIES

In addition to the surcharge, HMRC can charge you a penalty up to:

  • 100% of any tax under-stated or over-claimed if you send a return that contains a careless or deliberate inaccuracy
  • 30% of an assessment if HMRC sends you one that’s too low and you do not tell them it’s wrong within 30 days
  • £400 if you submit a paper VAT return, unless HMRC has told you you’re exempt from submitting your return using your VAT online account or Making Tax Digital compatible software

NEW PENALTY REGIME

The good news is that the introduction of the new regime has been deferred to January 2023 to allow HMRC more time to make the necessary systems changes.

The changes will replace default surcharge with:

  • Points- based penalties for late submission;
  • Interest charges; and
  • Late payment penalties.

We will update you as more information is made available by HMRC. 

1.25% increase to NIC and dividend tax rates 

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1.25% increase to NIC and dividend tax rates 

In an unprecedented move the government has confirmed that the rates of National Insurance are to be increased to pay for the impact of the coronavirus pandemic on the NHS and to address the long-standing funding gap for health and social care. This breaks the Conservative’s manifesto pledge on raising taxes and illustrates the ongoing trend that the Conservatives are no longer the government of low taxes.

From 1 April 2022, there will be a temporary 1.25% increase in class 1 (employee) and class 4 (self-employed) national insurance contributions (NIC) paid by workers, as well as a 1.25% increase in class 1 secondary NIC paid by employers (so 2.5% in total).

The increase will apply to employed (include deemed employees) and self-employed individuals and partners earning above the class 1 primary threshold / class 4 lower profits limit (currently £9,568 in 2021/22). Employers will pay the additional 1.25% for employees earning above the class 1 secondary threshold (currently £8,840 in 2021/22). Existing reliefs and allowances from employer’s secondary class 1 NIC will apply to the levy including the £4,000 employment allowance, reliefs for employers of apprentices, newly employed veterans, and new employees in freeports.

From April 2023, the increases will be legislated separately as a “health and social care levy” and NIC rates will return to 2021/22 levels. The levy will be hypothecated in law, meaning that the revenues will be ringfenced for health and social care. From that date, the legislation will also extend the revenue raising measure to individuals over state pension age in employment, who are currently exempt from paying NIC. 

The levy, including the temporary NIC increase in 2022, will be legislated for shortly so this is happening! Not only is this a tax increase but also an increase in the administrative burdens and costs for businesses with the need to amend payrolls from April 2022 and then again with the brand-new levy with effect from April 2023.

Dividend tax increase

Alongside the levy, which will be paid by employees, the self-employed and businesses, the government has announced a 1.25% increase in dividend tax rates from 1 April 2022, taking rates to: 8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers. The £2,000 dividend allowance will remain.

The increase in dividend tax rates will be legislated for in the next Finance Bill and the government estimates that 70% of the revenue raised will be paid for by additional and higher rate taxpayers in 2022/23.

How the health and social care levy will apply from 2022

Employee Class 1 NICs
Main rate (i) / Higher
rate (ii)Employer		Employer Class 1 NICsSelf-Employed Class 4
NICs
Main rate (i) / Higher
rate (ii)
NICs rates for 2021/2212%12% / 2%13.80%9% / 2%
NICs rates for 2022/2313.25% / 3.25%15.05%10.25% / 3.25%
NIC rates from
2023/24		12% / 2% 13.80%9% / 2%
Health and social care
levy from 2023/24		1.25%1.25%1.25%
Threshold at which
NICs become payable
in 2021/22		£9,568£8,840£9,568

Dividend tax rates and changes from 2022

Basic rate taxpayersHigher rate taxpayersAdditional rate tax
payers
Dividend tax rates for 2021/227.50%32.50%38.10%
Dividend tax rates from 2022/238.75%33.75%39.35%