New VAT penalty regime now in force

New VAT penalty regime now in force

A new VAT penalty regime commenced on 1 January 2023.  This replaces the default surcharge regime, which applied to the late submission and late payment of VAT. The introduction will likely be welcomed by many, as the previous regime was criticised for its occasional excessive punishment on minimal VAT payment or submission delays. 

It’s important to highlight, that failures relating to returns and payments for periods starting before 1 January 2023 will continue to be dealt with under the default surcharge regime and old interest rules. Penalties relating to other VAT error corrections and disclosures will also remain under ‘old’ rules which are based on behaviour and whether those errors were deliberate or careless, concealed or disclosed, etc.

1. Penalties for the late submission of returns

Under the new points-based regime a taxpayer will now receive a penalty point if they miss a VAT return filing deadline. They will be charged a £200 penalty for each failure to file on time, once a specified number of points are accrued. The number of points required for a penalty to be charged depends on the frequency of VAT returns (two points for annual returns, four points for quarterly returns and five points for monthly returns).

Penalties will also be applied to late repayment or nil VAT returns, which was not the case under the previous surcharge regime.

Further information on the application and removal of penalty points can be obtained here or by contacting a member of the specialist VAT team.

2. Late payment penalties

The new late payment penalty regime consists of two penalty charges. The first charge is a 2% penalty for VAT not paid by the end of days 15 and 30 after the due payment date.

A second late payment penalty is calculated on amounts outstanding from day 31 until the VAT is paid in full. This is calculated at a daily rate of 4% per annum, on the remaining VAT liability. The second penalty is calculated when the VAT is paid in full or until the date Time to Pay arrangements are accepted by HMRC.

In summary, there will be no penalty if the VAT due is paid in full up to 15 days after the due date or the taxpayer contacts HMRC up to 15 days after the due date with proposals for paying the VAT and, as a result, a Time to Pay agreement is reached (whether before or after the 15-day period).

Late payment interest will be charged on any payments made after the due date and will be charged at the annual rate of 2.5% above the Bank of England base rate.

Period of Grace from HMRC

A period of grace on the new penalties is available until 31 December 2023. During this period of time no penalty will be charged if all VAT owed on a return is paid within 30 days of the due date.

How to avoid or reduce a late VAT payment penalty

• Use direct debit arrangements to allow HMRC to collect the payment three working days after the due date.
• If you cannot make the full payment, try to make part payments as penalties are charged according to the VAT owed at the end of days 15 and 30.
• Agree a Time to Pay arrangement with HMRC - no penalty will be applied once a Time to Pay agreement has been accepted by HMRC.
• Ensure you submit your VAT returns on time even if you cannot make VAT payments on time.
• You may be able to avoid penalties on late VAT payments if you have a reasonable excuse. However, the kinds of excuses acceptable to HMRC are fairly limited.

We are here to help

If you have any questions about the new VAT penalty regime or would like to discuss your VAT position, please get in touch with a member of our specialist VAT team or your usual Azets advisor.