HMRC has introduced a new penalty regime for VAT periods which start on or after 1 January 2023. This includes new systems for late filing penalties and late payment penalties.
- Default surcharges will continue to apply for periods starting on or before 31 December 2022
- There will be no carry-over; everyone starts with a clean slate
- HMRC will still collect any amounts due in respect of previous periods.
Penalties for late filing of VAT returns
With the introduction of the new points-based system, one point will be issued per failure to file on time, this will also apply to nil and reclaim returns.
A £200 penalty will be charged when total points reach the threshold (for quarterly returns this is four). Individual points will expire after two years.
Once at the threshold, no more points will be added, but it’s important to note that every subsequent late filing will trigger a further £200 penalty. These points will only expire after a ‘period of compliance’. In the case of quarterly returns, points will only expire where VAT returns have been filed on time for a period of 12 months, and all VAT returns due in the last 24 months have been filed.
Examples of penalty points awarded
Example 1. Bob files his company VAT returns as follows:
Example 2. Bob files his company VAT returns as follows:
Late payment penalties
There will be two different penalties: First Penalty and Second Penalty.
The overall penalty will depend upon when the VAT liability is paid, or when a successful Time to Pay (TTP) request is made with HMRC.
This will apply to all payments due, including where it is as a result of HMRC amendment/correction, but only to balancing payments for payments on account/annual accounting.
Summary of late payment penalties
You’ll get a first late payment penalty if your payment is 16 or more days overdue.
When your payment is 31 or more days overdue, your first late payment penalty increases, and you get a second late payment penalty.
You should act to avoid further late payment penalties:
Between days 1 and 15 overdue
To avoid penalties that will apply from day 16 you should:
- pay in full
- ask for a Time to Pay on or between days 1 and 15
Between day 16 and 30 overdue
To avoid higher penalties that will apply from day 31 you should:
- pay in full
- ask for a Time to Pay on or up to day 30
On or after day 31 overdue
To stop your second late payment penalty and interest increasing you should:
- pay in full
- ask for a Time to Pay on or after day 31
Period of familiarisation
To give you time to get used to the changes, we will not be charging a first late payment penalty until after 31 December 2023. This is provided that, within 30 days of your payment due date, you either:
- pay in full
- make a Time to Pay arrangement
If you do not keep to a Time to Pay arrangement
If you do not keep to the conditions of the Time to Pay arrangement at any point, it may be cancelled. If this happens HMRC would charge both first and second late payment penalties as if the Time to Pay arrangement never existed.
Late payment penalty example
A company is a VAT-registered retailer that has submitted its June 2024 return by the deadline for its reporting period. But HMRC does not receive the £15,000 VAT they owe on time.
Payment is up to 15 days overdue: HMRC sends the company a late payment reminder letter asking them to pay in full to avoid penalties. They settle their VAT bill in full by the end of day 15 so they do not get a late payment penalty.
Payment is between 16 and 30 days overdue – The company makes full payment between day 16 and day 30 after the VAT is due. The first late payment penalty is calculated at 2% of the VAT that was outstanding at the end of the day 15.
HMRC charges a first late payment penalty of 2% of £15,000 = £300
Payment is 31 days or more overdue: The company pays the VAT they owe 51 days after the date it is due.
HMRC charges a first late payment penalty of £600, calculated at:
- 2% of the amount outstanding at day 15 (2% of £15,000 = £300)
- 2% of the amount outstanding at day 30 (2% of £15,000 = £300)
HMRC also charges a second late payment penalty calculated daily at an annual rate equivalent to 4% on the outstanding amount of £15,000.
HMRC charges 4% from day 31 of the payment being overdue up to and including day 51 when the company pays in full.
This works out as 21 days (£15,000 x 4% x 21/365 days) = £34.50
The total penalty that the company is charged for paying 51 days late is £634.50 from the:
- first late payment penalty of £600
- second late payment penalty of £34.50
Additional interest charges
HMRC will bring this into line with other taxes and apply an interest charge of the current Bank of England base rate plus 2.5%, this will be charged for the period between the due payment date and the actual date of payment.