New VAT penalty regime

by | Mar 28, 2023

VAT Penalties and Interest Charges


On 1 January 2023, a new late payment and points-based penalty regime was introduced which replaces the VAT default surcharge. The new penalty system applies to accounting periods which start on or after 1 January 2023.

There are separate penalties for late submission of VAT returns and late payment of VAT. The way in which late payment interest is calculated has also changed.


Late Submission Penalties


HMRC will allocate a 1 point penalty each time a filing deadline is missed until a taxpayer reaches the penalty point threshold. The thresholds vary to account for monthly, quarterly and annual accounting periods and a penalty will be charged when your total equals the following thresholds:

  • Annual returns: 2 points
  • Quarterly returns: 4 points
  • Monthly returns: 5 points

Once you reach the penalty threshold, you will receive a £200 late submission penalty. Further penalties of £200 will apply for each subsequent late submission while at the threshold.

The penalty points expire one the outstanding tax returns have been submitted and after a period of compliance (i.e. returns are submitted on time). The period of compliance will depend on whether you submit monthly, quarterly or annual returns and is as below:

  • Annual returns: 24 months
  • Quarterly returns: 12 months
  • Monthly returns: 6 months

The penalties for late VAT returns also apply to businesses that submit nil returns and repayment returns.


Late Payment Penalties


Payments that are over 15 days late will generate a penalty of 2% of the amount outstanding on day 15. If any of this tax is still unpaid after 30 days, the penalty increases to 4% of the tax still outstanding on day 30. From day 31, there will also be a daily penalty of 4% per annum on the amount outstanding and this will accrue until the outstanding VAT payment is settled.

In order to assist businesses getting used to the new regime, HMRC will not apply this rule for payments due on or before 31 December 2023 unless payments are more than 30 days late.


Late Payment Interest


Interest is charged from the first day that the payment is overdue until the day it’s paid in full. Interest will be charged at Bank of England base rate plus 2.5%. Interest will also be charged on late payment and submission penalties if they are overdue.


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