New VAT penalty regime from 1 January 2023

The Marketing Team
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HMRC have introduced a new VAT penalty regime for VAT returns which are submitted late or not paid on time for periods starting on or after 1 January 2023.

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The current default surcharge regime will still apply to VAT periods starting on or before 31 December 2022.

Currently, HMRC issue a default surcharge to VAT registered businesses who do not submit their VAT returns on time, or do not make payment of the VAT liability by the deadline. No default surcharge is due where there is no VAT payable or a repayment is due.

From 1 January 2023 a new penalty regime will come into place. One of the key differences between the old default surcharge regime and the new regime is that the new regime has separate penalties for late filing and for late payments. The late filing penalties will also apply to VAT returns where no payment is due, or a repayment is due.

Penalties for late filing

The VAT registered business will receive a penalty point for each VAT return that is submitted late. Once the business reaches a set number of penalty points, determined by the frequency of VAT return submissions, penalties will be charged by HMRC.

Penalties will be charged once the penalty thresholds have been reached as follows:

  • Annual VAT returns - 2 points
  • Quarterly VAT returns - 4 points
  • Monthly VAT returns - 5 points

Once the business has met the penalty point limit they will receive a £200 penalty. No further penalty points will be added however an additional £200 penalty will be charged for each subsequent late submission.

The penalty points can be reduced to zero however, this will only happen once HMRC have received all outstanding VAT returns for the previous 24 months and the business has submitted its VAT returns on time for 24 months in the case of businesses submitting VAT returns annually, 12 months for businesses submitting VAT returns quarterly, or 6 months for businesses submitting VAT returns monthly.

Penalties for late payments

Penalties and interest will apply to late payments for VAT return periods starting on or after 1 January 2023.

No late payment penalty will apply if payment is made within 14 days of the due date. After this date, the following penalties will apply:

  • 2% of the VAT outstanding at day 15
  • A further 2% of the VAT outstanding at day 30
  • Daily penalties at the rate of 4% per annum from day 31 until the VAT liability is paid in full

It is important to note as long as the business contacts HMRC by day 15 to arrange a payment arrangement, no penalties will apply unless the conditions of the payment arrangement are not adhered to.

Interest will be charged on late payments from the due date to the payment date at the rate of interest of Bank of England base rate plus 2.5%.

Repayment interest

HMRC will also be withdrawing the repayment supplement for VAT return periods beginning on or after 1 January 2023. HMRC will instead pay repayment interest from the day after the due date or the date of submission, whichever date is later, until the repayment is made. This will be at a rate of the Bank of England base rate minus 1%, subject to a minimum rate of 0.5%.

To allow VAT registered businesses to become familiar with the new penalty regime, HMRC has advised that it will not charge a first late payment penalty during 2023, provided that businesses pay in full within 30 days of the payment due date.

Nil returns and special circumstances

Importantly, even those businesses who submit nil returns or receive regular repayments and choose to submit all four quarterly returns once a year for example, will continue to accumulate points and therefore financial penalties for failing to submit their VAT returns on time.  As a result of this change, every effort should be made to both submit and wherever possible pay VAT returns by the due date.

Where a business takes over a VAT-registered business as a ‘going concern’ any penalty points accrued in the existing business will not carry over to the new owner’s VAT registration number. This also applies to cases where the VAT registration number is transferred from the previous owner to the new owner.

For VAT groups, where the representative member of a VAT group changes, any penalty points they have built up are transferred to the new representative member.  Therefore the penalty points are accrued by the group as a whole, rather than just the representative member.

HMRC have advised that the late submission penalty rules will not apply to:

  • The first VAT return for a newly VAT registered business
  • The final VAT return after the VAT registration is cancelled
  • One-off returns that cover a period other than a month, quarter or year

If you have any questions

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