New VAT Payment Penalty System

Did you know that the VAT payment penalty system was replaced in January 2023?  There have been two separate penalties introduced, one for the late submission of VAT returns and the other for the late payment of VAT liabilities.  The new system is based on penalty points and according to HMRC, will penalise “only the small minority who persistently miss their submission obligations rather than those who make occasional mistakes”.

The old VAT penalty system meant that even if payment was one single day late, taxpayers would be penalised.  That’s all changing.  Below are some of the highlights of the new VAT penalty system:

Late Submission of VAT Returns

Each time a VAT return is submitted late, HMRC will allocate one point.  Once the penalty point threshold is reached, the taxpayer will receive a £200 penalty automatically.  Every additional late VAT return will trigger a further £200 penalty whilst at the threshold.  The threshold is set by the accounting period:

Accounting PeriodThreshold
Annual2 penalty points
Quarterly accounting period4 penalty points
Monthly accounting period5 penalty points

It is possible to remove the penalty points if taxpayers:

  • Ensure that subsequent VAT returns are submitted by the deadline for the relevant ‘period of compliance’ (24 months of annual returns, 12 months for quarterly returns and 6 months for monthly returns).
  • Submit to HMRC all outstanding VAT returns due in the previous 24 months.

Late payment of VAT Liabilities

The new late payment penalty system is designed to encourage taxpayers to pay their VAT liabilities as soon as possible as essentially, the later the payment, the higher the rate of penalty charged. The penalties are:

Up to day 15No penalty
– 30 days2% penalty
>31 days4% penalty on the amount due, plus an additional daily penalty of 4% annualised

And that’s not all….

Interest on overdue tax will continue to be calculated and charged from the due date and will be at the Bank of England base rate plus 2.5%.

The good news…

To enable businesses to get used to the new changes, HMRC will not charge a first late payment penalty for the initial year (1 January 2023 – 31 December 2023), providing that the VAT is paid in full within 30 days of the payment due date.

These changes seem to be paving the way for a fair and proportionate system to encourage taxpayers to improve their compliance with VAT regulations.  However, as with any new system, there could be teething problems.  More detailed guidance is due to be published by HMRC, so this subject may arise later in the year.  Watch this space…

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