What is VAT?
VAT – Value Added Tax – is an additional tax on anything you sell, whether this is services or goods.
The standard rate at which it is charged is set at 20%, however, there are some zero-rated VAT goods and services, such as food, fundraising, medical care and property licensing.
For more information, take a look at our What is VAT? page.
Do I have to register for VAT?
You will need to register for VAT if your total taxable turnover for the last 12 months is over the threshold of £85,000. It will also apply to your business if you expect your turnover to go over this threshold in the next 30 days.
Some businesses will choose to register for VAT even if their turnover doesn’t exceed £85,000 and that is because it can come with numerous benefits, which you can read all about on our A Contractor’s guide to VAT page.
VAT changes – Penalty points, penalties and interest
The new penalty system was introduced on the 1st of January 2023, with HMRC stating that the new penalties ‘will be fairer and more proportionate for businesses who submit their VAT returns or pay their VAT late’.
The way in which interest is charged is also changing.
Here’s a breakdown:
Late submission penalties
These will now work on a points-based system with each VAT return submitted late resulting in a penalty point. Once you reach the penalty point threshold, a £200 penalty will be issued.
A further £200 penalty will also apply for each subsequent late submission while at the threshold.
The threshold is set by your accounting period depending on whether you submit:
- Annually (2 penalty points)
- Quarterly (4 penalty points)
- Monthly (5 penalty points)
Late payment penalties
A first late payment penalty will be issued for VAT payments that are more than 15 days overdue. After 30 days this penalty increases with a second late payment penalty added.
However, in order for businesses to get used to the new changes, HMRC will not charge a first late payment penalty on VAT payments due on or before the 31st of December 2023, as long as the amount due is paid in full or a payment plan is agreed within 30 days of the payment due date.
Interest
Late payment interest has been introduced, replacing previous VAT interest rules.
It is calculated at the Bank of England base rate, plus 2.5% and will be charged from the first day payment is overdue until it is paid in full.
Repayment interest has also been introduced, meaning that should HMRC owe you VAT amounts that you have overpaid and is late in doing so, you could be entitled to charge interest, which is calculated at the Bank of England base rate, minus 1%, with a minimum rate of 0.5%.
It’s worth noting that if you overpay in error, you won’t be able to claim interest – it’s only for repayment interest on overpayments that relate to an amount due to HMRC.
Payment plans
It is possible to set up a payment plan if you are worried that you can’t pay your VAT bill in full.
As long as it is set up and agreed by HMRC within 15 days of payment being due, a late payment penalty will not be issued.
Hopefully this page has answered some of your questions, but if you have any further queries, our team of experts are available to help, so give us a call on 01442 795 100 or email sophie.lewis@dolanaccountancy.com.
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