A new penalty system for VAT now applies to VAT periods starting on or after 1 January 2023, not only changing how penalties are applied but, also, how interest is calculated and paid.
What is changing?
The biggest change that businesses can expect is a replacement of default surcharges with new penalties for late submissions and late payments.
The objective of this shift is to reward businesses that comply with their VAT obligations on a timely basis.
Additionally, the calculation of VAT interest has changed, as well as how it is to be paid.
Who is affected by the new VAT penalty regime?
All businesses submitting VAT returns starting on or after 1 January 2023 are affected by these latest changes. This includes anyone submitting a nil return, or a repayment return.
Claire Gardiner, Bookkeeping Manager at GH Online Accounting, comments: “It’s really important that businesses acknowledge that any return, is a return, including nil returns or repayment returns. Nil and repayment returns that are filed late will still attract penalties.
“It can be all too easy to adopt the mindset that ‘it’s ok because it’s a nil return’, because under the previous system the surcharge was deemed to be on the amount owed.
“Under the new penalty system, regardless of your VAT position, filing and paying what you owe, on time, will be crucial to avoid unnecessary sanctions.”
How do the new penalties work?
HM Revenue & Customs (HMRC) has outlined a points-based system for late submission, i.e., for each return you submit late, you will receive a penalty point.
Depending on the frequency of your submissions, you will be able to incur points up to a specified threshold, as follows:
| Accounting period | Penalty points threshold |
| Annually | 2 |
| Quarterly | 4 |
| Monthly | 5 |
Once the relevant threshold is reached, a further late submission will attract a £200 penalty, with the same issued for each subsequent late submission.
Effectively, more frequent non-compliance results in higher penalties; though, it is possible to reset your points to zero with consistent satisfaction of your obligations, in a given time-frame.
A separate approach will be taken to late payments, to incentivise businesses to comply with their obligations, as follows:
- Up to 15 days overdue
You will not be charged a penalty if you pay the VAT you owe in full, or agree a payment plan, on or between days one and 15.
- Between 16 and 30 days overdue
You will receive a first penalty, calculated at 2 per cent of the VAT you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.
- 31 days or more overdue
You will receive a first penalty, calculated at 2 per cent of the VAT you owe at day 15, plus 2 per cent of the amount outstanding at day 30. In addition, you’ll receive a second penalty calculated at 4 per cent per year for the duration of the outstanding balance. This is calculated in full when the balance is settled, or a payment plan is agreed.
Claire Gardiner, Bookkeeping Manager, comments: “Businesses need to be aware of the possible consequences of late returns and payments, in respect of their VAT obligations.
“Obviously, the easiest way to avoid penalties is to ensure that VAT returns are submitted on time, and that amounts owed are also settled promptly.
“However, with the penalty regimes for late submission and late payment operating independently, businesses should be spurred to file on time, even if they cannot pay, and vice versa.”
VAT support and advice for your business
We pride ourselves on being able to deliver a service that tackles compliance and advisory in equal measure.
If you want one less thing to worry about, contact us to see how we could help you take care of your VAT returns, efficiently and compliantly, and in doing so ensure that you are always meeting your obligations.
