Will a time-to-pay agreement help?

New penalty regime

The previous default surcharge regime will no longer apply for your VAT returns where the period starts on 1 January 2023 or later. This is good news because this draconian system could - in extreme cases - result in a 15% penalty for paying your return one day late.

The aim of the new system is to penalise persistent offenders. The key rules are as follows:

• payment is made within 15 days of the due date, - no penalty will be charged
• unpaid tax after the end of day 15 will be subject to a 2% penalty
• if any tax is still unpaid after the end of day 30, a further 2% penalty will be charged
• from day 31, an annual penalty rate of 4% will apply on tax still owed.

Although you will not be charged a penalty for paying up to 15 days late, you will still be charged interest from the date the VAT was payable.

As a first-year concession, the initial 2% penalty will not apply if you fully pay the tax you owe by the end of day 30 after the due date. Note the phrase “fully pay” is key to earning this concession.

Example. Jane owed £8,000 VAT on her March 2023 return, due by 7 May 2023. She paid £5,000 on 22 May and the balance on 7 July. Jane has escaped a penalty on the £5,000 late payment because 22 May is the 15^th day after the due payment, so is just in time. However, she will be subject to a 4% penalty on the other £3,000, i.e. 2% at the end of day 15 and the same percentage after day 30. The period between day 31 and 7 July will be subject to another penalty based on an annual rate of 4%.

Time-to-pay agreement

Jane could have avoided penalties on the £3,000 balance if she had agreed a time-to-pay (TTP) arrangement with HMRC before the end of day 15. This would have stopped the penalty clock from ticking.

Your business can make a TTP proposal by contacting HMRC’s Payment Support Service - telephone number 0300 200 3835 - opening times are 8am to 6pm Monday to Friday.

If you propose a TTP arrangement and the officer takes a few days to approve it, then your proposal date is the key date for penalty purposes rather than the later date of approval.

What if you break the TTP plan?

If you fail to fulfil the conditions of the TTP arrangement, then HMRC will recalculate penalties you owe “as if the TTP agreement was never in place”. This could prove very costly to your business. However, the penalties will take account of the payments you made with the agreement before breaking its conditions.

Example. Let’s say VAT owed at day 30 was £3,000; a TTP was agreed on day 40 to pay £300 per month for ten months. One payment was made with the TTP on day 60. The penalty will be £3,000 x 4% for 20 days/365 days and then £2,900 x 4% annualised rate for days thereafter until more payments are made.