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New Year, New VAT Penalty Rules

In January this year a new penalty points system was introduced for the late filing of VAT returns and the late payment of VAT.

The new rules come into play for returns starting on or after 01 January 2023 and have replaced the previous default surcharge regime. The new system also affects the way interest is calculated when taxpayers are late in paying HRMC.

Late filing of VAT Returns

The new penalties system for late VAT returns, will work on a points system. HRMC will penalise taxpayers one point each time a filing deadline is missed.  Once you reach the relevant number of points, a £200 penalty will be issued. The number of points required for a penalty to be charged depends on the frequency of your VAT returns.

Submission period Points threshold
Annual 2 points
Quarterly 4 points
Monthly 5 points

If you miss any subsequent deadlines you will trigger another £200 penalty.

It is important to remember that points can be given for late repayment and nil returns which was not previously the case.

Late payment of VAT

For the late payment of a VAT return, there are two parts, fixed penalties, and daily penalties. The later the payment the higher the rate of penalty.

  • fixed penalties
    for VAT unpaid after 15 days following the payment due date, a 2% penalty of the amount outstanding at day 15 will apply. Late payment of 31 days or more will trigger an additional 2% penalty, based on the amount outstanding on day 30 (a total of 4% if nothing has been paid)
  • daily penalties
    from day 31 onwards a daily penalty of 4% per annum will be applied on the amount outstanding

Any payment up to 15 days late will not trigger a penalty regardless of the number of occurrences. If a taxpayer contacts HMRC and agrees a Time to Pay Agreement up to 15 days after the due date no penalties should be applied.

But, as a final sting in the tail, interest on overdue tax will continue to be charged from the due date at the Bank of England base rate plus 2.5% even where a time to pay arrangement has been agreed.

VAT Returns which will not incur a penalty

The late submission penalties will not apply to:

  • your first VAT return if you are newly VAT registered
  • your final VAT return after VAT registration is cancelled
  • one-off returns that cover a period other than a month, quarter, or year

If you take over a VAT-registered business as a ‘going concern’ any penalty points built up by the business will not be transferred to your VAT registration number. This will be the case even if the VAT registration number is transferred from the previous owner to the new owner.

If the representative member of a VAT group changes, any penalty points they have built up are transferred to the new representative member.

Expiration of late penalty points

Any points that you may accumulate will not automatically expire. To reset your points to zero you will need to meet a test of good compliance.  This will include submitting everything on time for a certain period and submitting any outstanding returns from the previous 24 months.

This good compliance period again depends on the frequency of your VAT returns.

Submission period   Compliance period
Annual 24 months
Quarterly 12 months
Monthly 6 months

HMRC Period of Grace

To allow VAT registered businesses to adjust to the new regime, HRMC will not charge a first late payment penalty during 2023, providing businesses pay in full within 30 days of the payment due date or arrange a payment plan.

You can find out more about the changes  on the GOV.UK website.

If you have any concerns reading these new changes, please get in touch with our expert VAT team.

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