Do you know about the new VAT penalties?

New VAT penalties for late returns and payments have been in effect since January 2023. These rules mean businesses face penalty points for late submissions, which can escalate to fines. Understanding the thresholds, penalties, and interest charges is crucial to avoid unnecessary costs. This guide outlines what you need to know about the new VAT penalty system, including how to avoid fines and manage late payments effectively.

Penalties for the delay in returns and timely payment are now applicable to VAT periods that begin on or after 1 January 2023. Interest is also charged in a new way.

Late submissions

A penalty point shall be awarded to each late submission, until you reach the threshold of points. If this threshold is reached, you will be issued with a £200 fine and another £200 fine for every subsequent late submission whilst you are at the threshold.

What are my Penalty Point Thresholds?

The thresholds depend on your VAT accounting period:

Annual VAT accounting - 2 points
Quarterly VAT accounting - 4 points
Monthly VAT accounting - 5 points

Removing penalty points

If you are not at the threshold, the points will expire after 24 months.
If you are at threshold, you must complete and submit all your returns by the deadline,
together with any remaining return for the following 24 months.
The number of returns for your period of compliance all depend on your VAT accounting period:

Annual VAT accounting - 24 months - 2 returns
Quarterly VAT accounting - 12 months - 4 returns
Monthly VAT accounting - 5 months - 6 returns

Late payment penalties

If you feel at risk of being late with payment, you can at any point in time call HMRC to propose a payment plan and this could mean you will receive lower or no penalties and more time to pay.

It should be noted that late payments can arise from other reasons than paying your VAT return late: These could be from an amended earlier return Or from a VAT assessment issued by HMRC either because you didn't submit your return or for another reason.

The penalties will depend on how late your payment is:

If you pay your VAT within 15 days of the due date, then there will be a late payment penalty for the first or second late payment.
If you pay within 16 and 30 days, the first instance will see a penalty of 2% of the VAT owed added on day 16, but no penalty for the second late payment.
If your payments are more than 31 days overdue, then for the first penalty it is calculated at 2% of what was owed at day 15 PLUS 2% of what is still outstanding at day 30.
For the second late payment, it's a daily rate of 4% per year on the outstanding balance and charged daily from day 31 until the payment is made in full.

There will be a period of familiarisation over 2023 with no first penalties being charged if you pay within 30 days or put a time to pay arrangement in place. Time to pay arrangements are a serious agreement and must be adhered to otherwise HMRC will charge all penalties to you.

Late payment interest

Interest will be charged from the day that a payment is overdue - this is in addition to any penalties. Interest is calculated daily and is at 2.5% above the Bank of England base rate.

Repayment Position

If you are in a repayment position and HMRC are late paying you then they will pay you interest, this is at the Bank of England base rate minus 1%, with a minimum rate of 0.5%.

You always need to try and submit your VAT on time, if you have difficulties with payments, talk to HMRC immediately about setting up a payment schedule as soon as possible. We're always available for answering any questions that you might have, as the best course of action would be to know everything there is to know before not being able to make a payment.