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Don’t get caught out by VAT penalties

This year was the 50th anniversary of the introduction of Value Added Tax (VAT) in the UK, but despite being around for so long, many businesses still find managing this tax too complicated. Unsurprisingly, more registered businesses than ever are now receiving penalties from HMRC for inaccuracies in their VAT returns.

A new VAT penalty system for submitting returns or paying tax bills late came into force on 1st January 2023, replacing the old regime and also applying to nil or repayment returns. HMRC is now issuing correspondence to businesses that have incurred VAT penalties under the new system – some of which may not be aware of their errors.

Frozen thresholds and inflation

The two primary factors that may be leading to businesses failing to meet their VAT obligations are high inflation rates and frozen tax thresholds. The registration threshold for VAT has stayed the same since 2017, so increased prices could push businesses over the £85,000 annual turnover threshold even if they haven’t grown in size.

This threshold is due to remain frozen until 2026, with more and more businesses expected to become liable for VAT over this time, even if inflation drops to 2%
by 2025. As this is predicted to raise an additional £1.4 billion in tax revenue by 2028, it’s essential for businesses to stay on top of their VAT liabilities to avoid penalties.

Similarly, the annual income thresholds for accounting methods have stayed the same for over a decade. Though the government announced intentions to adjust the cash basis scheme earlier this year, in the meantime, it’s very easy for businesses to mistakenly continue using the wrong accounting scheme for their income bracket.

Beware VAT penalties

With HMRC aiming to increase VAT revenue and shrink the tax gap, the risk of small businesses being penalised for VAT
inaccuracies will only get higher. The tax agency expects businesses to take responsibility for their own tax liabilities, and seek appropriate guidance if there is something they are unfamiliar with.

The new scheme introduced this past January runs a point-based penalty system for late VAT submissions and a percentage penalty system for late VAT payments. This can lead to a £200 penalty for not submitting returns on time, or up to 4% of the outstanding balance for an overdue tax bill (plus interest at the Bank of England rate +2.5% – currently 7.75%).

There are also fines of £100–£400 for failing to keep records and submit returns electronically through the Making Tax Digital
online portal, and penalties of £5–£15 a day until the digital records are updated. Online digital submissions have been compulsory for VAT
since November 2022, so HMRC is likely to be sceptical of excuses.

Additionally, should you make any errors in your VAT return, and HMRC believes this was a result of carelessness, you could receive a significant penalty. This could be up to 30% of the outstanding tax for lack of reasonable care, up to 70% for deliberate error, or up to 100% for a deliberate error that was also deliberately concealed.

Get help with VAT returns

To avoid incurring any of these penalties, you must be sure to submit complete and accurate VAT returns on or before the annual deadline, using Making Tax Digital compatible software (unless you have been granted an exemption by HMRC).

As this is the first year of implementing the new system, HMRC
may be willing to be more lenient towards genuine VAT errors – as long as these issues are corrected and any outstanding tax is paid as soon as possible.

The tax agency also has the discretion to suspend a VAT penalty for up to 2 years, after which it could be cancelled if the business has complied with specified conditions during this period, such as improved record-keeping.

Of course, it’s best to prevent this scenario from occurring by keeping accurate VAT records and submitting returns on time in the first place. If your business has trouble with this, you could use professional assistance with VAT management.

Here at gbac, we have a team of accountants in Barnsley that includes expert tax consultants. To arrange a bookkeeping and VAT consultation, give us a call on 01226 298 298, or email an enquiry to info@gbac.co.uk
and we will be in touch.