Changes to VAT Penalty Regime

The VAT penalty regime changed with effect for accounting periods starting on or after 1st January 2023. 

The VAT surcharge system has been replaced and the way HMRC calculates interest has also changed.

Generally, the penalties are lower than they were under the old surcharge regime and only start to increase when payment is later than 31 days after the due date. 

There could however be penalties of £200 for those who submit their returns late – even if there is no VAT due or a repayment is due.  This is a change from the previous regime and could catch out some who tend to get VAT repayments and who have previously filed late.

A summary of the new rules is detailed below.

For Late Submissions

Penalties will now be calculated on a points-based system.  You will be allowed a maximum number of points before penalties kick in and the number of points a business is allowed will depend on how the returns are submitted:

Annual returns – maximum points - 2

Quarterly returns – maximum points – 4

Monthly returns – maximum points – 5

A business will get one point for each return that is late.

Penalties

Once a business reaches the maximum points, they will then get a £200 penalty and continue to get a further £200 penalty for any further late returns whilst they hold the maximum points.

When will points come off?

Points will automatically come off after 24 months if a business hasn’t reached the maximum points.  If a business has reached the maximum points and received a penalty then a period of compliance is required before the points can be removed (12 months for quarterly returns and returns also need to be up to date).

This penalty regime will apply for nil returns and even when there is a repayment. For any returns that we have historically got in late as they are repayments, they could get penalties if more than 4 returns are late.

For Late Payment of VAT

The penalty for late payment will depend on how quickly a business pays the overdue VAT and how much it is.

First Late PaymentSecond Late Payment
Payment up to 15 days overdueNoneNone
Payment between 16 and 30 days overdueCalculated at 2% on the VAT you owe at day 15None
Payment 31 days or more overdueCalculated at:
• 2% of what was outstanding at day 15
• Plus 2% of what is still outstanding at day 30
Calculated at:
• A daily rate of 4% per year on the outstanding balance
• Charged everyday from 31 until the outstanding balance is paid in full
Table of penalties for the late payment of VAT

Generally, the surcharges are much lower than the old regime and increase when the liability is more than 31 days overdue.

You can also contact HMRC to agree a time to pay arrangement which can mean no or less penalties.

Interest on Late Payments

Late payment interest is charged from the first day that the payment is overdue until the day it is paid in full.  It is calculated currently at the Bank of England base rate of 2.5%.

Detailed guidance can be found here.

Please get in touch with any queries.

For our latest updates follow us on LinkedIn, Facebook and Twitter.