New VAT penalties for late VAT returns and payments

Late submission penalties

HMRC is introducing new penalties for VAT returns that are submitted late. These replace the old default surcharge system. The penalties apply to all returns, even if it is a nil return or a return that claims a repayment from HMRC. This new regime will affect all VAT periods starting on or after 1 January 2023.

The late submission penalties work on a points-based system. For each late return a penalty point is incurred, until the penalty point threshold is reached. When the threshold is reached, a penalty of £200 is incurred for each subsequent late return while the business is at the threshold.

The penalty point threshold is set according to the frequency that the returns are submitted. Where annual returns are submitted, the penalty point threshold is two points. The threshold for quarterly returns is four points and five points for monthly returns.

For example, a business submits quarterly returns, thus they have a threshold of four points. The business submitted three returns late. Consequently, it has accumulated three penalty points. When the next return is submitted late, it has reached the points threshold of four and incurs a £200 penalty. Any future late return will incur a £200 penalty. If the next return is submitted on time, it will remain on four points, but no penalty will be incurred.

Details of any penalties can be checked on the business’s VAT online account. A review of the penalties can also be requested through the online account.

Penalty point expiration

Penalty points expire automatically. Where the deadline for a return was not the last day of a month, the penalty point expires on the last day of the month, 24 months afterwards. Where the deadline is the last day of the month, the points expire on the last day of the month, 25 months afterwards. Where the penalty points threshold has been reached, the penalty points can only be removed if both of the following apply.

• A period of compliance has been completed. This usually means that the next four VAT returns must be submitted on time if the business uses quarterly returns.

• All outstanding returns for the previous 24 months have been submitted.

Late payment penalties

Where a VAT payment is late, a penalty can be incurred. A first late payment penalty is incurred if the VAT payment is 16 or more days late. When the payment is 31 or more days late, the first late payment penalty increases and a second late payment penalty is incurred.

The first late payment penalty is 2% of the VAT owed on day 15. Where the payment becomes 31 days or more overdue, the first late payment penalty is calculated at 2% of what was outstanding on day 15 plus 2% of what was still outstanding on day 30.

The second late payment penalty is calculated at a daily rate of 4% per year on the balance outstanding and charged each day from day 31 until the outstanding balance is paid in full.

The penalty can be reduced by paying off outstanding amounts. Penalties can also be reduced by making a Time to Pay arrangement with HMRC.

Late payment interest

In addition to the late payment penalty, interest is also charged on any unpaid amounts of VAT. It is charged from the first day that the payment is overdue until the VAT is paid in full. Interest is charged at the Bank of England base rate plus 2.5% on the outstanding amount.