VAT Penalty Scheme

As part of HMRC’s ambition to become a modern, trusted tax authority, it is changing the way penalties are issued for submitting late VAT returns and paying VAT late, which will affect all VAT registered businesses from 1^st January 2023. The new penalties replace the default surcharge system and now also apply to clients who submit nil or repayment returns.

The new points-based system for late submissions is designed to be more lenient for the occasional mistake, whilst still penalising those who repeatedly fail to comply. ​

To avoid penalties, you must:

• Submit your vat returns on time using software that is compliant with Making Tax Digital (unless you have applied for an exemption from HMRC from Making Tax Digital). Click here for more information on Making Tax Digital.

• Pay your vat bill on time

The way that HMRC calculates interest on late payments and repayments of VAT that they owe the client has changed for vat periods starting on or after 1^st January 2023.

Late VAT Returns

For VAT periods starting on or after 1^st January 2023, penalties for submitting returns late will work on a points-based system.

For each late return one penalty point will be given, each client will be given a penalty point threshold. If you reach your point threshold you will have to pay a fixed penalty of £200. You will also have to pay another £200 penalty each time you submit a late return whilst you’re at the threshold limit.

Your points threshold will depend on how often you submit your returns, see here for more information on the thresholds.

If you have reached the threshold for late submission penalty points, you will need to take action to remove them to avoid further £200 penalties. If you have not reached the threshold, individual points will expire automatically.

You can check penalty points in your online VAT account and appeal a point or financial penalty.

Late Vat Payments

The changes mean that if you pay VAT-related amounts late, you will be asked to pay late payment interest (2.5%) on the amount outstanding, from the first day your payment is overdue to the day you pay it in full. If your payment is more than 15 days overdue, you will have to pay a first late payment penalty. If your payment is more than 30 days overdue, you will be charged a second late payment penalty.

Basically, the sooner you pay the smaller the penalty will be. These changes aim to simplify and separate penalties and interest. Please click here for more information on penalties for late payments and here for information on interest.

HMRC are issuing support for clients for them to get used to the new penalty system in the first year. They have stated that they will not charge a first late payment penalty on VAT payments due on or before 31^st December 2023, if you either:

• Pay in full within 30 days of your payment due date
• Ask for a payment plan within 30 days of your payment due date and HMRC agrees to it.

If your payment is 31 days or more overdue, you will have to pay a first and second late payment penalty.

Repayments due

The repayment supplement has now been discontinued. If you are owed VAT from HMRC and they are late in paying you the repayment, HMRC will pay you repayment interest. This will be calculated at Bank of England base rate less 1% and has a minimum rate of 0.5%. Click here for more information on repayment interest and how it is calculated.