VAT penalties from 1 January 2023– points add up to penalties

From January 2022, the government has introduced a new penalty regulation for late submission of VAT returns or not paying VAT within the due date. It is in addition to the HMRC’s move to Making Tax Digital (MTD) and the requirement for VAT-registered businesses to submit VAT returns using MTD-compliant software from November 2022.

The new penalty system will separate penalties for late VAT return submission and late VAT payment. Additionally, it will change how interest is calculated for taxpayers paying late to HMRC and vice versa.

Table of contents:

Late VAT returns: Points for VAT penalties

The new late VAT penalty points system, which will eventually apply to all taxes, is designed to be less severe when a user occasionally forgets to file their returns before the deadline.

Tax Advisor

Each time a filing date is missed, HMRC will assign the taxpayer 1 point, and just like “points” on a driving license, your points for late returns will expire after a certain amount of time has passed unless you exceed the threshold for penalties.

A significant new development in the system is that points can now be won for late nil and repayment returns.

A £200 penalty will be assessed once you accumulate the necessary points. There would be a charge for each consecutive missed deadline.

Points for penalties

A penalty will be levied when your total points equal the following thresholds:

Submission periodPoints threshold
Annual2 points
Quarterly4 points
Monthly5 points

VAT returns not incurring penalties

There are specific situations where points will not be accumulated, and you do not incur penalties. These are:

●  First VAT return for new VAT registration
●  Final VAT return after your VAT registration is canceled
●  One-off returns that make up for a period other than a year, quarter, or month

Resetting the points clock after a penalty

Once you have triggered a penalty doesn’t mean the penalty points you accumulated will automatically expire. Instead, to restart the clock, you must pass the strict test of good compliance for a particular period and submit all your outstanding returns due in the previous 24 months.

Good compliance is based on your return cycle, as below.

Submission timeframeCompliance period
Annual24 months
Quarterly12 months
Monthly6 months

VAT Penalties for late payment

The new penalty points system will be implemented in two phases, with fixed penalties and daily penalties. In general, the later you are to make payments, the higher the penalty rate will be charged.

Payments up to 15 days late after the addressed payment deadline will not trigger a penalty, regardless of how often it happens. There’s a general exclusion where a taxpayer accepts the Time To Pay Agreement with HMRC.

Late payments for 16 to 30 days will provoke a 2% penalty of the amount outstanding on day 15. However, to aid business transactions to adjust with the new system, HMRC will not enforce this regulation during 2023 unless payments are late for more than 30 days.

Late payments for 31 days or more will provoke a 2% penalty of the amount outstanding on day 15, plus an extra 2% penalty calculated on the amount owed on day 31. You must pay a 4% penalty if nothing has been paid during this period.

From day 31, for every late payment, a daily penalty will be calculated at 4% annually on the unpaid balance. For example, a VAT obligation that is not paid after 13 months will result in a total tax penalty of 8%.

Even in cases where a time-to-pay arrangement has been established, interest on past due taxes will continue accumulating and be charged starting on the due date at the Bank of England base rate plus 2.5%.

How to avoid a penalty?

The best way to avoid penalties is to file VAT returns and pay the VAT amounts on time.

Even if you cannot pay your VAT bill within the deadline, submitting your return on time is still preferable to avoid the risk of paying £200 penalties and approach HMRC for a Time to Pay Agreement.

HMRC has announced that they plan to permit a “period of familiarisation” as the new system has recently been operating. Therefore, companies won’t be assessed a first-time late VAT payment penalty for up to 30 days till 31 December 2023. Instead, they will be given time to adjust to the changes.

A company will always be able to challenge either a late filing point or a late payment penalty within 30 days of receiving notice of the point/penalty from HMRC. It can be accomplished in one of two ways: appealing to the first-tier tax tribunal or asking HMRC to conduct an internal evolution of the decision.

The criteria for a “reasonable excuse” has not changed, so the taxpayer must always demonstrate that they had a valid cause for missing the relevant deadline. Recently there will be an online option for HMRC appeals.

Depending on the substantial number of default surcharge disputes that have advanced to tribunals in the current years, HMRC hopes that the new point penalty system will lead to fewer taxpayer challenges.

Existing default surcharges
From 1 January 2023, all companies begin with a ‘clean slate’ concerning late VAT filing and payment penalties. There are no transitional provisions. All returns starting before  January 2023 are subject to the Default surcharge regime, and HMRC will issue and enforce penalties under the existing system.

What interests will be charged for late payment and repayment?

The new penalty system includes default interest when a taxpayer is late in making a payment to HMRC and repayment interest when HMRC is slow in making a payment to a taxpayer. The new regime addresses this consistently while eliminating the historic Repayment Supplement regime for periods beginning on or after 1 January 2023.

The Repayment Supplement regime compensated a taxpayer when HMRC was late in making repayment for more than 30 days considering the time when the ‘clock’ was halted and started for HMRC queries and taxpayer responses.

This was accomplished by adding 5% to the refund for the VAT return, but this regime was solely applicable to VAT returns. It did not extend, for instance, to refund requests made under the Voluntary Disclosure system, where HMRC has experienced significant delays in the last few years.

●  Default/ late payment interest
Default interest is applicable from day one when the payment is overdue until the day it is fully paid. It will be 6% as of early January 2023, which is equal to the interest base rate of the Bank of England plus 2.5%.

This interest applies to late VAT returns, due payments under HMRC assessments, voluntary disclosures of VAT owed to HMRC, late POA (Payment on Account) instalments, and past-due VAT fines.

If the due amount is reimbursed in instalments,  for example, under a Time to Pay arrangement, HMRC will calculate interest on the outstanding balance until the tax is fully paid.

●  Repayment interest
For periods starting on 1 January 2023, or later, if HMRC is sluggish in paying, a taxpayer may be eligible to Repayment interest on any owed VAT. As mentioned previously, this now includes refunds asserted on voluntary disclosures.

Repayment interest will be paid at a rate of 2.5% in early January 2023, which is presently the Bank of England base rate minus 1%, with a minimum rate of 0.5%. However, HMRC will not pay repayment interest when taxpayers still have outstanding VAT returns.

The starting day for the repayment interest depends on whether the VAT has already been settled on a VAT return with HMRC.

  • If the VAT claimed has been reimbursed to HMRC, the repayment interest period begins on a later date after the VAT was settled with HMRC and the deadline in question.
  • If the VAT claim has not been paid to HMRC, the repayment interest will start later than the accounting period deadline in question and the submission date of the VAT return or claim.

Like other taxes, the overpaid VAT may be offset by another tax amount owed to HMRC, and repayment interest ends on the day of the offset.

Tax Advisor

Wrapping up

Understanding that the penalties and interest charges can sum up quickly and significantly impact your business finances is essential. Therefore, business owners must take their VAT obligations seriously and stay on top of VAT returns and payments. Additionally, anyone can take help from experts to avoid incurring penalties with the new HMRC point penalty regime.

123Financials Editorial Team
The 123Financials editorial team is composed of seasoned finance and accounting experts with a combined experience of over 20 years. Specializing in UK finance, accounting, and tax-related content, our team is dedicated to delivering insightful and practical advice to startups and small businesses. With a strong background in both the theoretical and practical aspects of financial management, we ensure that our readers stay informed and empowered to make sound financial decisions. Whether it’s navigating the complexities of UK tax laws or providing strategic financial planning tips, our team is committed to excellence and accuracy in every article.