There is little doubt that a review of the VAT default surcharge regime was long overdue.
Under the current regime, HMRC applies a charge from 2 per cent rising to 15 per cent of the tax due where a return has not been filed or payment made on time. The tax tribunals have numerous examples where huge penalties have been incurred because the tax due, or submitted return, was only one day late.
From April 2020 the current VAT default surcharge regime will be replaced by two new penalties.
In relation to the late payment of VAT, when an amount of VAT is not paid by the due date, late payment interest will be charged from the date that the payment was due until the date that the payment is received. This will work in a similar way to the existing arrangements for income tax and corporation tax.
In relation to the late submission of VAT returns, a points-based late submission penalty regime will be introduced whereby a taxpayer will automatically receive a point every time they fail to submit a VAT return on time.
Under this points-based system, which will also be applied to other taxes in due course, when a certain threshold of points is reached, a financial penalty will be charged for every subsequent failure to make a return on time.
Clearly taxpayers should file their VAT returns and pay their VAT on time, and therefore a sanction that encourages them to do so, and results in financial sanctions for not doing so, must be a good thing.
What is, as yet, unclear however is whether the new regime, particularly the points-based late submission penalty, is less capricious than the current default surcharge regime.
If a taxpayer pays the ‘right tax at the right time’ but, for whatever reason fails to submit his VAT return by the due date, could the points-based penalty be just as disproportionate as the current regime?
What of the taxpayer who has seasonal trade - will his accrual of points lead to a bigger penalty during his peak trading period when he submits that requisite return one day late?
Or the large business which regularly makes its payment on account on time, but is somewhat less than diligent in submitting its returns on time - will it receive a bigger penalty because the return relating to the large balancing payment occurs in a period when it has accrued more penalty points than its lower VAT liability periods?
Unfortunately, as the details of the financial penalties attributable to the points-based system has not yet been disclosed, these questions cannot, at present, be answered. This is far from satisfactory.
It is important that the replacement to the VAT default surcharge regime, must take into account the nature and degree of seriousness of the infringement to be sanctioned, and go no further than is strictly necessary to meet the relevant compliance objectives.
If, however, the financial penalties for the late submission of returns are in any way based on the quantum of tax due, either implicitly or unreservedly, then it remains to be seen whether the new regime will be any less palatable than the one it is replacing.