A Golden Anniversary for the “Simple Tax”

1973 was a momentous year!

Starting on a Monday, 1973 kicked off with a “Long Haired Lover from Liverpool.”  In cinema, The Godfather won the Oscar for Best Picture.  Whilst in politics, Roe v Wade was decided by the Supreme Court, and on the first day of the year, the UK joined the European Economic Community (EEC).

As a condition for joining the EEC, the previous Purchase Tax regime was abolished, and replaced with Value Added Tax (VAT).  When it was introduced by the then Chancellor, Anthony Barber, it was famously described as a “simple tax”.

The UK got its first taste of VAT on 1 April 1973.  However, this was not an “April Fool”, and VAT was here to stay.  Initially set at 10%, the standard rate was reduced to 8% after the first 15 months.  However, from 1979, the VAT rate has increased on a number of occasions, reaching the current standard rate of 20% just over 12 years ago.

Now, as we approach the 50^th Anniversary of the introduction of VAT, the UK has cut its ties with the European Union and Roe v Wade has been overturned.  The song may say “No income tax, no VAT”, however, VAT is here to stay.

To commemorate VAT’s Golden Anniversary, we will be releasing a series of blogs throughout 2023 exploring topics such as Jaffa Cakes, joiners, charities, international services and many more.  However, to kick off, we highlight changes to the penalties system which came into effect on 1 January 2023.

POINT BASED SYSTEM

The new system implements a points-based approach which will now not penalise taxpayers for one-off mistakes but will focus on repeated non-compliance. This is being referred to as a “drivers’ licence” approach.

This system imposes a single penalty point for each instance of non-compliance (late filing of a VAT return) and has different thresholds based on the taxpayer’s return frequency.  Therefore, a taxpayer submitting quarterly VAT returns would not incur a penalty for non-compliance for its first three late returns.  A taxpayer will see their points expire only after a period of compliance, for quarterly returns, this is a year as with the current system.

PENALTY VALUES

There are separate penalties for late submission of the return and for late payment of the VAT due.

For late submission, HMRC will charge a flat £200 penalty per offence. Importantly, the late submission of a nil or repayment return will also result in a penalty.

There is a separate sanction for late payment but this is broken down into separate periods to avoid punishing taxpayers who are marginally late.  No penalty will apply for the first 15 days, however thereafter a 2% penalty will apply.  If the VAT is still overdue after day 31 taxpayers will receive a further penalty which accrues at a daily rate of 4% per year on the outstanding balance until the tax is paid in full.

TIME TO PAY (TTP)

Where the taxpayer enters into a Time to Pay (TTP) arrangement, provided that it is honoured by the taxpayer, penalties will stop accruing.

LATE PAYMENT INTEREST (LPI)

LPI will be charged on VAT outstanding after the due date, starting from the date the payment was due until is it received by HMRC. LPI is calculated as simple interest at a rate of 2.5% above the Bank of England base rate.

If repayment interest is due from HMRC, it will be paid at the Bank of England base rate less 1%.

Importantly, LPI will continue to apply, even where there is a TTP arrangement in place.

HONEYMOON PERIOD

HMRC have conceded a transition period for taxpayers to get used to the changes and have agreed they will not be charging a first late payment penalty for the period 1 January 2023 until 31 December 2023 if the taxpayer pays in full within 30 days of the payment due date.

For fuller details of the new Penalty regime, see our previous blog here

If you are unsure about anything or would like further information, please contact Alistair Duncan or your usual AAB contact.