All Change For The VAT Penalty System From 2023

From January 2023, HMRC are introducing a new penalty system for the late filing/payment of VAT returns, completely overhauling the current surcharge system.

The current system works on the basis that if you are late with either your VAT return filing, or payment, there is no penalty but instead, you are then put on a 12 month surcharge notice period. If you then default again within that 12 month period, the surcharge notice period will continue for the next 12 months, and you may be charged a penalty. How large the penalty is will be determined by factors such as business turnover, amount of VAT owed and number of defaults.

However, from 1st January 2023, this is all to be changed.

The new VAT penalty system

Under the new system, late filings of VAT returns will be penalized separately to the late payment of any VAT due.

VAT return filed late

For late VAT return submissions, a new ‘penalty points’ system is to be introduced. Every time a return is filed late, a penalty point will be applied. If you reach a penalty points threshold, you will be fined £200, and then £200 for every late submission after that. You can revert to zero points if all VAT returns are submitted by their due date within your compliance period.

The penalty points threshold is determined by how often your VAT returns are due:

  • If you submit annual VAT returns, the penalty points threshold is 2 points, with a compliance period of 2 years.
  • If you submit quarterly VAT returns, the penalty points threshold is 4 points, with a compliance period of 1 year.
  • If you submit monthly VAT returns, the penalty points threshold is 5 points, with a compliance period of 6 months.

Penalty points expire after 2 years.

VAT payment made late

If your VAT liability is paid late, the penalty is applied differently.

  • Up to 15 days late, no penalty will be applied (provided payment is made within 15 days, or a payment plan is agreed).
  • Between 16 and 30 days late, a 2% penalty (based on the VAT outstanding at day 15) will be applied.
  • 31 plus days late will have the above 2% penalty applied, plus another 2% penalty (based on the VAT outstanding at day 30).
  • There will also be a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance (calculated once the payment is made/payment plan agreed).

There will also be interest charged on the late payment of VAT, calculated at 2.5% above the Bank of England’s base rate, and applied from the first day the amount is overdue.

The good news is that HMRC will also be paying repayment interest to customers who are owed a VAT refund from them. This will be calculated as the Bank of England’s base rate minus 1% (minimum interest rate to be 0.5%), applied from the date the submission is received/due (whichever is later) until the date payment is made by them.

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