For VAT accounting periods starting on or after 1 January 2023, it’s out with the old – the default surcharge regime – and in with a new penalty system designed to be fairer and more proportionate.
New VAT rules at a glance
- New penalties apply for late submission of VAT returns and late payment
- There are changes to how VAT interest is calculated.
The impact of some of the rules may come as something of a surprise. Any late submission brings exposure to late submission penalty points and even financial penalties. This applies across the board, even where submitting a nil or repayment return.
The new late submission penalties use a points-based system, with each late return triggering a penalty point. These points automatically expire after 24 months unless a penalty threshold is reached in that time.
The penalty threshold varies, depending on whether returns are filed annually, quarterly or monthly returns: it is four points for quarterly returns. On hitting the penalty threshold, a £200 penalty accrues, with further £200 penalties charged for each subsequent late submission. If there has been a penalty, points are reset to nil by showing compliant behaviour for a period set by HMRC (dependent on the filing frequency). This route involves submitting all returns on or before the due date, and ensuring all outstanding returns for the previous 24 months are filed.
For the new late payment penalty system, the sooner VAT is paid, the lower the penalty range. Penalties escalate on a sliding scale:
- payment in full, or agreeing a payment plan on or between days 1 and 15: no penalty (though interest is charged)
- payment in full or arranging a payment plan on or between days 16 and 30: first penalty calculated at 2% of the VAT owing at day 15
- 31 days or more overdue: first penalty calculated at 2% of the VAT owing at day 15, plus 2% of the VAT owed at day 30. Second penalty, calculated at a daily rate of 4% per year for the remaining duration of the outstanding balance (calculated when outstanding balance is paid in full or payment plan agreed).
HMRC is giving a ‘period of familiarisation’ from 1 January 2023 to 31 December 2023, in which a first late payment penalty will not be charged if payment is made in full within 30 days of the due date.
You can see more detailed examples of how the penalty points are applied here