Reminder that new penalty regime for VAT will hit farmers

Farmers who submit late VAT returns or miss their payment deadlines could now be fined £200.

The new points-based penalty regime was introduced in January - after being delayed nine months – and has replaced the default surcharge system used for many years to penalise businesses for late VAT returns.

It affects all businesses that fail to meet their obligations to submit returns and other information requested by HMRC on time. There is no longer an automatic financial penalty and instead, a points-based system is used before a financial penalty is levied.

Crucially, the new system also means 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 default surcharge system, the surcharge was based on a percentage of the VAT liability and therefore a penalty was not due for a repayment return being submitted late.

How the new late submission penalties work

The new system is a two-step process for businesses that fail to submit their VAT returns on time:

1. A business receives 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 – 4 for quarterly returns and 5 for monthly returns - a financial penalty of £200 will be charged.

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

How the 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 on day 15 plus 2% of the outstanding amount on day 30. In most instances, this will amount to a 4% charge on 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 penalties, businesses 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 can help navigate the process.