New VAT Penalty System
Starting from January 1, 2023, the VAT default surcharge system will be replaced by a new penalty points system, wherein separate penalties will be imposed for late submission of VAT returns and late payment of VAT. Furthermore, the new system alters the calculation method for interest charged to taxpayers who are late in paying HMRC and vice versa.
Late VAT Submissions
The penalty system
Late submission penalties work on a points-based system.
For each return you submit late, you will receive a penalty point until you reach the penalty point threshold.
When you reach the threshold, you will receive a £200 penalty. You will also receive a further £200 penalty for each subsequent late submission while you’re at the threshold.
The penalty point thresholds
Submission Period Penalty Points Threshold
Monthly 2
Quarterly 4
Annually 5
Penalty example for a business making quarterly returns
A company submits their VAT Return quarterly. This means their penalty point threshold is 4.
They already have 3 penalty points because they submitted 3 previous returns late.
They submit their next return late and get a fourth penalty point. Because they’ve reached the penalty point threshold, they receive a £200 penalty.
The company submits their next return on time. They stay at the threshold of 4 penalty points but do not get a £200 penalty.
The company submits their next return late. As they are still at the penalty point threshold of 4 points, they receive another £200 penalty.
Resetting the points clock after a penalty
The penalty points that you have accumulated will not automatically expire as normal once you have triggered a penalty. Instead, to reset the clock you have to meet a longer test of good compliance (ie submitting everything on time) for a specified period and submit any outstanding returns due in the prior 24 months. The good compliance period will depend on your return cycle as below.
Submission Timeframe Compliance Period
Monthly 24 months
Quarterly 12 months
Annually 6 months
Late VAT Payments
The new system will apply in two stages, fixed penalties and daily penalties: basically, the later the payment is, the higher the rate of penalty charged.
Payments that are up to 15 days late (ie after the specified payment deadline) will not trigger a penalty regardless of the number of occurrences. There is also a general exclusion where a taxpayer agrees a “time to pay” arrangement with HMRC.
Payments that are between 16 and 30 days late will trigger a penalty of 2%; (of the amount outstanding at day 15) – although, to help businesses transition to the new regime, HMRC will not apply this rule during 2023 unless payments are more than 30 days late.
Payments that are 31 days late or more will trigger a 2% penalty of the amount outstanding at day 15 plus an additional 2% penalty calculated based on the amount outstanding at day 31 i.e. a total of 4% if nothing has been paid.
From day 31, there will also be a daily penalty (calculated at 4% per annum) on the amount outstanding, e.g. a VAT liability left unpaid for 13 months will have triggered a total of 8% in tax penalties.
Interest on overdue tax will continue to be charged from the due date at Bank of England base rate plus 2.5% and will continue to accrue even where a “time to pay” arrangement has been agreed.
