New VAT penalty system

New VAT penalty system

The first monthly returns and payments affected by HMRC’s new VAT penalty regime are due by 7 March 2023. The new rules apply to the late submission and/or late payments of VAT returns for VAT return periods beginning on or after 1 January 2023. 

Under the new regime, there are separate penalties for late VAT returns, late payment of VAT and a new methodology for how interest is charged. This replaces the old default surcharge regime and should represent a fairer system for most taxpayers.

Points-base system

The new system is points-based. This means that taxpayers will incur a penalty point for each missed VAT submission deadline. At a certain threshold of points, 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 will be 4 points. The penalty points will reset to zero following a compliance period; quarterly returns require 12 months of compliance. There are also time limits after which a point cannot be levied. 

Two new late payment penalties

In addition, the new system 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. To help with the introduction of the new system, HMRC has confirmed that it will not be charging a first late payment penalty for the first year of the new 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 will be charged from the date payment is overdue until the date it is paid in full. Late payment interest is calculated as the Bank of England base rate plus 2.5%.

Source: HMRC