The new penalty regime for late VAT payments

Late payment guidance to share with clients

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For VAT returns for accounting periods starting on or after 1 January 2023 the new payment penalty system is to be replaced by a points-based late filing penalty regime and a new late payment regime. 

The new regime was originally due to take effect for VAT accounting periods beginning on or after 1 April 2022 but has been delayed until 1 January 2023. The delay is thought to be to give HMRC more time to update its systems.

Late submission of VAT returns and point system

The new penalty points system for late VAT returns is intended to be less punitive where the taxpayer misses the occasional deadline. The new system will penalise those who persistently miss their submission obligations and not those who make occasional mistakes.

The point system will work as follows:

  • For each VAT return that was late, a taxpayer will receive one late submission penalty point.
  • When the relevant number of penalty threshold points has been reached (see below), a £200 penalty will be charged.

Points for penalties

A penalty will be charged when the total points equal these thresholds:

  • annual VAT returns: 2 points
  • quarterly returns: 4 points
  • monthly returns: 5 points

Reset the penalty points clock

The penalty points that you have accumulated will not automatically expire once you have triggered a penalty. Instead, to reset the clock you must meet a test of good compliance period that will depend on the return cycle (please see below) and submit any outstanding returns due in the prior 24 months.

Good compliance period:

  • annual VAT returns: 24 months
  • quarterly returns: 12 months
  • monthly returns: 6 months

Late payment 

The new penalty system will apply in two stages – fixed penalties and daily penalties. For late payment penalties, the sooner you pay the lower the penalty rate will be. The penalties will be as follows:

  • There will be no penalty charged for payments that are up to 15 days late after the due payment date.
  • Payments that are between 16 and 30 days late will trigger a penalty of 2% of the amount outstanding at day 15 if you pay in full (or agree a payment plan on or between days 16 and 30).
  • Payments that are more than 31 days late will trigger a 2% penalty of the amount outstanding at day 15 plus an additional 2% penalty calculated based on the amount outstanding at day 30 (ie a total of 4% if nothing has been paid).
  • From day 31, there will also be a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full or a payment plan is agreed. A penalty is only charged on tax owed on the penalty trigger dates.
  • Interest on overdue tax will continue to be charged from the due date at Bank of England base rate plus 2.5% and will continue to accrue even where a time to pay arrangement has been agreed.

Where a business has overpaid tax, interest on overpaid tax being repaid will be at Bank of England base rate less 1%.

First-year concession

To give time to get used to the changes, HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, provided all the tax owed on a return is fully paid within 30 days of the payment due date.

Avoiding a penalty

Obviously submitting the return and paying the VAT on time is the best way of avoiding the extra cost. But some tips to avoid a penalty include:

  • Sset up a direct debit, so HMRC can automatically collect the amount due and will ensure that the deadline is not missed.
  • If a business can't afford to pay the whole VAT amount, set up a Time to Pay arrangement with HMRC. The interest will still be charged, but the penalty clock will stop ticking.
  • As always, a business will have the right to appeal a late filing point or late payment penalty within 30 days of being notified of the point/penalty by HMRC, based on 'reasonable excuse'. The definition of a reasonable excuse has not changed. Because the penalties will be fairer HMRC is hoping that the new penalty regimes result in fewer taxpayer challenges.