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Understanding the New VAT Penalty Regime and its Impact on Businesses
Table of Contents
Introduction to the New VAT Penalty Regime
The first monthly returns and payments influenced by HMRC’s new VAT penalty regime were due by 7 March 2023. The new VAT penalty rules apply to late submissions and/or late payments of VAT returns for VAT return periods starting on or after 1 January 2023.
Under the new VAT penalty regime, there are distinct penalties for late VAT returns and late payment of VAT, as well as a new methodology for calculating interest charges. This replaces the old default surcharge regime and, for most taxpayers, should represent a fairer system.
New Penalty Structure for Late VAT Returns and Payments
The new VAT penalty regime is points-based, meaning that taxpayers will receive a penalty point for each missed VAT submission deadline. Once a certain threshold of points is reached, a financial penalty of £200 will be charged, and the taxpayer will be notified. The threshold varies depending on the required submission frequency (monthly, quarterly, annual). For quarterly VAT returns, the penalty points threshold is 4 points. The penalty points will reset to zero after a period of compliance, which for quarterly returns requires 12 months of observation. There are also time limits after which a point cannot be levied.
Points-Based System in the New VAT Penalty Regime
The new VAT penalty regime also introduces two new late payment penalties. A first payment penalty of 2% of the unpaid tax that remains outstanding 16-30 days after the due date. The second payment penalty increases to 4% of any unpaid tax that is 31 or more days overdue. However, to ease the transition to the new system, HMRC has confirmed that it will not be charging a first late payment penalty for the first year of the new VAT penalty regime (1 January – 31 December 2023) once the debt is paid in full within 30 days of the payment due date or if a payment plan is agreed.
Late Payment Interest Calculation
Late payment interest will be charged from the date payment is overdue until it is paid in full. Late payment interest is calculated as the Bank of England base rate plus 2.5%.
