CH193140 - Penalty reform - penalties for failure to pay VAT on time from 1 January 2023: how late payment penalties work: first late payment penalty & second late payment penalty
NB: “These rules currently only apply to VAT for VAT periods starting on or after 1 January 2023. These rules will come into force for other tax regimes at a future date. You must check the date from which these rules apply for the tax or duty you are dealing with”
The late payment penalties operate in relation to how many days have passed since the payment should have been made. This depends on whether the amount is due as a result of a VAT return, an assessment etc. as set out in CH193080. Day 1 is the first day after this date. Day 15 is the fifteenth day after this date and so on.
First late payment penalty
If any VAT remains unpaid after day 15 following the payment due date and no application for a Time to Pay (TTP) agreement has been made, the person incurs the first penalty.
This penalty is set at 2% of the tax outstanding on day 15. If any of this VAT is still unpaid after day 30 and no TTP application has been made the penalty will be calculated as 2% of the VAT outstanding after day 15 plus 2% of the VAT outstanding on day 30.
The first penalty will be charged after day 30, when it is known whether one or both 2% elements are due.
Second late payment penalty
If VAT remains unpaid on day 31 and no TPP application has been made the customer will be liable to a second penalty on the VAT that remains outstanding. It accrues on a daily basis starting on day 31, at an annual rate of 4% on the outstanding amount. This second penalty will stop accruing when the taxpayer pays the tax that is due in full or makes a proposal that results in a successful TTP application.
The legislation allows HMRC to make regulations for charging the second penalty at various intervals, instead of only at the end when the total level of penalty is known.
On 4 December 2024, The Penalties for Failure to Pay Tax (Schedule 26 to the Finance Act 2021) (Assessments) Regulations 2024 came into effect. This says where tax remains unpaid, HMRC may make an assessment for the second late payment penalty. You may make an assessment where payment is outstanding or not paid in full from 7 days before the 2 year time limit.
The table below shows how the late payment penalties work in practice.
| Penalty | Calendar days after the payment due date | Customer situation | Penalty position |
|---|---|---|---|
| No penalty | Up to 15 days overdue | Customer pays in full or makes proposal that results in a TTP* | No Late Payment Penalty charged |
| First Penalty | Between 16 and 30 days overdue | Customer pays in full between days 16 and 30 of the due date | First Penalty calculated at 2% of amount unpaid at the end of day 15 |
| First Penalty | Between 16 and 30 days overdue | Customer does not pay in full but makes a proposal between 16 and 30 days of the due date that results ina TTP* | First Penalty calculated at 2% of amount unpaid at the end of day 15 |
| First Penalty | Between 16 and 30 days overdue | Customer does not pay in full and does not make a proposal that results in a TTP* within 30 days of the due date | First Penalty calculated at 2% of what was outstanding at day 15 plus 2% of what is still outstanding at day 30 |
| Second Penalty | 31 days or more overdue | Until customer pays in full or proposes a TTP* | A Second Penalty is calculated at a rate of 4% per year from day 31 for the duration of the outstanding balance and is calculated when the outstanding amount is paid in full. The Second Penalty period ends on the day that full payment is received, with the calculations based on the balance at the start of that day. For TTP, the day the person contacts us to propose a TTP which results in an agreement is not included. |
| Second Penalty | 31 days or more overdue |
Customer
does not pay in full and does not make a proposal that results in a TTP* between
day 31 of the due date and the 2 year time limit |
A Second Penalty is calculated at a rate of 4% per year from day 31 and ends on the day you make the penalty assessment, with the calculations based on the balance at the start of that day. You may make an assessment for the tax that remains outstanding from 7 days before the 2 year time limit. |
*the proposal has to be agreed and upheld for the TTP period
FA21/SCH26/PARA 4 – No penalty
FA21/SCH26/PARA 7 – First Penalty
FA21 SCH26/PARA 8 – Second Penalty
The Penalties for Failure to Pay Tax (SCH26 FA 21)(Assessments) Regulations 2024- Second Penalty
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)