Radical changes coming for VAT
A new penalty system will be introduced for VAT periods beginning on or after 1 January 2023.
A VAT registered business will be charged a two per cent penalty for VAT not paid by the end of day 15 after the due payment date. There will be a further two per cent penalty for tax still unpaid by the end of day 30. An annual penalty rate of four per cent will apply thereafter until the tax is finally paid.
Late payment interest will also be charged on all tax paid late. It will be charged at the annual rate of 2.5 per cent above the Bank of England base rate. A formal time-topay arrangement with HMRC will prevent penalties being charged but not interest.
As a first year concession until December 31 2023, a penalty will not be issued by HMRC if all tax owed on a return is fully paid within 30 days of the due payment date. Additionally, for VAT periods starting on 1 January 2023 and later, a new points and penalty system will be introduced for late VAT Returns.
This is a radical change from the current system where only late VAT payments are penalised, although a late return still generates a surcharge liability notice. A key outcome is that late repayment returns will be subject to a potential penalty which has never happened before in the 49-year history of VAT. This is a significant change for vat registered farm businesses.
HMRC recently issued information about business and non-business activities. HMRC previously determined whether an activity was a business activity for VAT purposes based on case law dating back to the 1970s; and 1980s. HMRC will now apply the new policy from 1 June 2022. Factors considered by HMRC include the purpose of the activity to create income; is the intention to make a profit; is the payment so low as to be a concession; is the activity conducted based on sound business principles and what is the scale of the activity.
The effect of the change by HMRC may now be that some non-profitable organisations may be regarded as being in business. If their annual turnover is more than £85,000 they may be required to be VAT registered.
HMRC are introducing many changes. To manage these changes, to benefit from them where there is an advantage, and to remain compliant, up to date record keeping and regular consultation with the accountant are necessary.