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New penalty regime for VAT will hit farmers

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A new regime to be introduced from January 2023 will see farmers who submit late VAT returns facing penalties.

The plans were originally due to come into effect in April 2022 but have been delayed 9 months. These changes will replace the current default surcharge system that applies to the late submission and payment of VAT returns.

The new late submission penalties will affect businesses who fail to meet their obligations to submit returns and other information requested by HMRC on time. There will no longer be an automatic financial penalty, instead a points-based system will be used before a financial penalty is levied.

Crucially, the new system will also mean that farmers who normally claim repayments and who do not submit their returns on time will receive a penalty when the points threshold is breached. Under the current default surcharge system, the surcharge was based as a percentage of the VAT liability and therefore a penalty was not due for a repayment return being submitted late.

How will the new late submission penalties work?

The new system will result in a two-step process for businesses who fail to submit their VAT returns on time:

  1. A business will receive a single point every time a submission deadline is missed and will be notified of this by HMRC.
  2. At a set threshold of points – four for quarterly returns and five for monthly returns - a financial penalty of £200 will be charged.

Points will have a lifetime of 2 years, after which they will expire. However, points will not expire when a business is at the penalty threshold, to ensures a period of compliance is met to reset the points.

How will the new late payment penalties work?

Farmers who have VAT to pay over on some returns, perhaps from the issue of contracting invoices or sale of machinery need to be aware of the new penalties. No penalty will be payable provided the VAT is paid within 15 days of the due date. From day 16 late payment penalties will be incurred in the following stages:

  1. The first penalty is set at 2% of the outstanding amount if payment for the return is made between 16 days and 30 days after the due date.
  2. If there is any tax left unpaid 30 days after the due date of the VAT return, then the penalty will be set at 2% of the outstanding amount at day 15 plus 2% of the outstanding amount at day 30. In most instances this will amount to a 4% charge at day 30.
  3. A second late payment penalty is charged at a rate of 4% per annum, calculated daily on the total unpaid tax incurred from day 31.

To avoid a penalty, businesses will need to either pay the VAT due or approach HMRC to agree a ‘time to pay’ arrangement. Businesses that sometimes submit late returns, perhaps at busy times of the year, need to be aware of the new rules to ensure they don’t receive a financial penalty.

As with all major changes, taking professional advice at an early stage can help navigate the process.


For professional advice regarding your farming business, please get in touch to speak to one of our agricultural accountants.

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