Don't pay the (VAT) penalty for being late!

New VAT penalties on late returns

For VAT return periods starting 1 January 2023, HMRC has introduced a new penalty regime for the late submission or payment of VAT returns, bringing them in line with other taxes and replacing the often unfair default surcharge regime. The new penalties introduce a points system that treats late filing and late payment separately.

The key elements are:

Penalty points are accumulated for late submission of VAT returns, leading to potential fines.
The value of late payment penalties is based on how late the balance was paid.
Late payment interest is charged on any outstanding amounts.

How do the new and old VAT penalty regimes compare?

Late filing points and penalties

Old default surcharge regime

New regime

In most cases no financial penalties were issued, or defaults recorded, if only the VAT return itself was late, but the payment was received by HMRC on time.

Penalty points will be issued for ALL late VAT returns.

£200 fixed penalty will be issued when the points threshold is reached. This varies depending on VAT return frequency.

Either nil returns or repayment returns could be filed late without financial penalties.

Late payment penalties

Old default surcharge regime

New regime

A financial penalty (surcharge) could be imposed between 2% and 15% of the VAT amount paid late, even if the payment was only one day late.

Surcharge % dependant on the previous default history.

No late payment penalties issued for payments received by HMRC up to 15 days late.

Further penalties are staggered depending on how late the payment is received: 16 – 30 days and over 30 days

Late payment interest

This is likely to be the most significant change to affect usually compliant businesses who are occasionally late.

Old default surcharge regime

New regime

No interest was due on late payments of VAT.

Interest will be accrued for each day the payment is late following the due date.

HMRC calculate interest daily, based on an annual rate of 2.5% above the Bank of England base rate.

Whilst comparison examples of the two regimes have highlighted a potential reduction in the overall penalties paid by persistent defaulters, it is those who perhaps pay less VAT or indeed pay no VAT, who may start to incur penalties and/or daily interest under the new regime.

HMRC – soft-landing period for VAT penalities

There is a soft-landing period until 31 December 2023 meaning that HMRC will not charge the first late payment penalty. However late filing points and interest will still accrue.

Example:

A typical business submits calendar quarterly VAT returns and every return is filed late throughout 2023. When the fourth return is filed late a fourth penalty point is issued, reaching the points threshold. A £200 penalty is issued by HMRC with a further £200 penalty issued for each subsequent late return, until the points are reset (see factsheet for further details).

The same business also pays each VAT return late, within 30 days. During the soft-landing period no penalties are issued, whereas normally there would be a first penalty calculated at 2% of the VAT unpaid on day 15.

Further penalties are issued for VAT unpaid at day 30 and later, even during the soft-landing period.

Avoiding VAT penalties

Ultimately paying as much as possible as soon as possible will reduce any potential penalties and interest. We would always therefore advise you to pay as much as you can afford.

If you cannot afford to pay the VAT due on time you should contact HMRC as soon as possible to request a ‘time to pay’ arrangement. If a time to pay is agreed by HMRC and the business sticks to the plan, no late payment penalties will be charged but interest will still be accrued.

Submitting the VAT return on time, regardless of payment, will avoid the new late filing points and potential penalties.