CH193480 - Penalty reform - penalties for failure to pay VAT on time from 1 January 2023: other penalty issues: breathing space

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”

Regulations made by HM Treasury came into force on 4 May 2021 and provide a Debt Respite Scheme to give individuals in problem debt the right to legal protection from creditor action while they receive debt advice.

Under the scheme eligible individuals have access to a moratorium period (often referred to as “Breathing Space”) during which interest, fees and charges are frozen and enforcement action is paused. More information on Breathing Space can be found here

A dedicated team within Debt Management are responsible for handling cases in HMRC, including setting flags on systems to indicate a Breathing Space period.

Breathing Space will cover eligible business debts incurred by small traders who are not VAT registered at the time of entering Breathing Space including interest and late payment penalties. To be an eligible debt, it has to have been owed, and included in the application, at the time of the application for Breathing Space

Note: For VAT debts to be eligible for Breathing Space protections, an existing VAT debt must belong to a customer who is a sole trader and has deregistered from VAT​.

Late Payment Penalty

Where an element of a Late Payment Penalty arises during the Breathing Space period, that element is not charged. This could include the penalty due at day 15, or day 30, of the first Late Payment Penalty, or any daily accrual of the second Late Payment Penalty. Any element of a Late Payment Penalty arising outside the Breathing Space period will still be charged but, if it would otherwise be notified within the moratorium, the notification will be delayed until this period has passed. This is to ensure compliance with the Breathing Space Regulations