A new VAT penalty regime is now in place

HMRC introduced a new VAT penalty and interest regime on 1 January 2023 which  changes how penalties are applied, as well as how interest is calculated and levied. 

What has changed?

The fundamental change is that the default surcharge system is being replaced.

Late submissions and late payments are now penalised separately and by different methods.

Interest will now be payable on late payments.

Who is affected?

All VAT-registered entities submitting VAT returns starting on or after 1 January 2023.

How do the new penalties for late submission work?

HMRC has outlined a points-based system.

For each VAT return that is submitted late, the entity will receive 1 point.

This applies to all returns including repayment and nil returns.

A £200 penalty is levied when the entity’s points threshold is reached.

The frequency of the returns will dictate the points threshold.

• Annual Accounting Scheme the threshold is two points in a 24-month period.
• Quarterly returns the threshold is four points in a 12-month period.
• Monthly returns the threshold is five points in a 6-month period.

Each point will expire after 24 months.  If the entity reaches the threshold, a period of on time compliance will have to be met to have the points removed.

How do the new penalties for late payments work?

• A penalty will not be charged if a payment is made between 1 – 15 days late.
• A two per cent penalty will be charged between days 16 – 30
• On day 31 you will receive the two per cent penalty on the balance outstanding at day 15 plus a further two per cent on the balance outstanding on day 30.
• You will then be charged second penalty of a daily rate of 4 per cent until the balance is cleared.

The entity will still be charged a 2 per cent penalty if they pay in full or set up a time to pay arrangement during days 16 – 30.

HMRC will until 31 December 2023, not be issuing a late VAT payment penalty if the liability is settled or a time to plan arrangement is set up within 30 days.

How does the new late payment interest work and how is it calculated?

Interest is charged from the first day the payment is late until the liability is settled in full.

The rate charged is the Bank of England base rate plus 2.5 per cent.

VAT-registered entities need to be aware of the consequences of late returns and payments.

It has always been financially beneficial to file returns and make payments before deadlines under the surcharge system to avoid incurring additional costs.  This new regime has a higher financial cost, which entities should be looking to mitigate.

If you require any advice on this or any other matters relating to VAT, please speak to our specialists.