VAT penalty reform: Don’t get caught by the changes from January

VAT penalty reform: Don’t get caught by the changes from January

For businesses who file their VAT returns commencing from 1 January 2023, there will be a new penalty and interest regime if you submit and/or pay VAT late.

What is changing?

  • New penalties if you submit VAT returns late

    • For each VAT Return you submit late you will receive one late submission penalty point.
    • Once a penalty threshold is reached (see below), you will receive a £200 penalty and a further £200 penalty for each subsequent late submission.
    • Points can be reset to zero if you submit your returns on or before the due date for your period of compliance and all outstanding returns from previous 24 months are filed with HMRC.
    Submission frequency Penalty points threshold Period of compliance
    Annually 2 24 months
    Quarterly 4 12 months
    Monthly 5 6 months

  • New penalties if you pay VAT late

    For late payment penalties, the sooner you pay the lower the penalty rate will be.

    • Up to 15 days overdue – You will not be charged a penalty if you pay the VAT you owe in full or agree a payment plan on or between days 1 and 15.
    • Between 16 and 30 days overdue – You will receive a first penalty calculated at 2% on the VAT you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.
    • 31 days or more overdue – You will receive a first penalty calculated at 2% on the VAT you owe at day 15 plus 2% on the VAT you owe at day 30. You will receive a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full or a payment plan is agreed.

    HMRC will not be charging the first penalty for the first year of the new regime if the taxpayer pays the amount due in full within 30 days of the payment due date.

  • Late payment interest

    For VAT returns starting on or after 1 January 2023, interest calculated at 2.5% + the Bank of England base rate will be charged from the date the payment is overdue until the day it is paid in full.

  • Introduction of repayment interest

    The repayment supplement will be withdrawn from 1 January 2023 and for accounting periods starting on or after 1 January 2023, HMRC will pay you repayment interest on any VAT that you are owed.

    This will be calculated from the day after the due date or the date of submission (whichever is later) and until the day HMRC pays you the repayment VAT amount due to you in full.

    Repayment interest will be calculated as the Bank of England base rate minus 1%. The minimum rate of repayment interest will always be 0.5% even if the repayment interest calculation results in a lower percentage.

Who does this impact?

These changes effectively replace the default surcharge regime and splits the penalty for late submission aside from that for late payment, whilst introducing interest for late payments.

This will affect everyone submitting VAT Returns for accounting periods starting on or after 1 January 2023.

It is important to note that businesses who are submitting nil or repayment returns can still get caught by a late submission charge, if they do not submit returns on time.

Also, for late payments, there is a period of grace before a penalty is issued (up to 15 days) but interest will be charged. This reduces the issues of overseas clients in particular, making transfers for VAT return payments that are delayed by the banks.

The good news is that the new penalty system is less severe and fairer than the previous ways HMRC penalised businesses. The goal is better behaviour, rather than simply penalising mistakes.

However, all businesses should ensure that they are aware of how these new rules will operate, to avoid falling foul of their filing requirements and incurring penalties.

There will also be changes to the self assessment penalty regime, as part of the launch of Making Tax Digital Income Tax (MTD IT) which is expected to be introduced from 6 April 2024. We will share further details of these changes in due course.

1280 853 Rouse Partners

Nicola Gladwell

With a career in VAT spanning over 20 years, Nicola advises businesses of all sizes; from start-ups to major international organisations. See more

All stories by : Nicola Gladwell

This information has been produced by Rouse Partners LLP for general interest. No responsibility for loss occasioned to any person acting or refraining from action as a result of this information is accepted by Rouse Partners LLP. In all cases appropriate advice should be sought before making a decision.

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