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

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:

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

How do the new and old VAT penalty regimes compare?

1. Late filing points and penalties

2. Late payment penalties

3. Late payment interest

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

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

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.

VAT late penalties factsheet

Further details explaining how HMRC intend to administer the new penalties and interest can be found in our factsheet here