New VAT penalty regime: Is your business ready?

27 October 2022


VAT & Customs Duty

The new points based penalty regime for submitting VAT returns or making payments late comes into effect for all VAT periods starting on or after 1 January 2023.

With only 3 months to go, now is the time to make sure you are aware of the changes and what it could mean for your business.

How will the points system work? 

Late submission of VAT returns 

Where a VAT return is submitted late, a penalty point will be applied. This will apply even when the returns are nil or in a repayment position.

Each point received will count towards the relevant VAT penalty points threshold which is based on the frequency of your VAT returns, as outlined below:

Submission frequency Penalty points threshold Period of compliance
Annually  2 24 months
Quarterly 4 12 months
Monthly 5 6 months

Once the penalty point threshold is reached, a £200 penalty will be charged along with an additional £200 for every further late submission.

Points do not simply drop off over time but will be reset to zero where all returns and payments are submitted on time for the relevant period of compliance required above.

Late payments

In addition to receiving a penalty point for the late submission of a VAT return, HMRC have introduced a penalty for late payments which will be based on percentages outlined below. This penalty will apply irrespective of your overall penalty point position for late submissions.

The penalty percentages are based on the amount of time the VAT debt remains outstanding:

  • Up to 15 days – There will be no penalty charged if you pay the VAT due in full or agree a payment plan on or between days 1 and 15.

  • 16-30 days – The first penalty is calculated at 2% of the VAT due at day 15, if you pay in full or agree a payment plan on or between days 16 and 30.

  • Over 31 days – The first penalty calculated at 2% on the VAT due at day 15 plus 2% on the VAT due at day 30.

    A second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance. The second penalty is calculated when the outstanding balance is paid in full or payment plan is agreed.

Interest on the VAT due will also be charged in addition to any penalties, calculated from the day the payment is overdue to the day the payment was made in full.

Late payment interest will be calculated using the Bank of England base rate plus 2.5%.

‘Light Touch’ implementation

HMRC have advised there will be a ‘period of familiarisation' where it will not charge a first late payment penalty during the first year of implementation (from 1 January 2023 until 31 December 2023), provided payment is made in full within 30 days of the payment due date.

Withdrawal of the repayment supplement

As part of the changes, the VAT repayment supplement provisions will cease from 1 January 2023.

HMRC will instead pay repayment interest of the Bank of England base rate minus 1% (minimum of 0.5%) on any VAT due from HMRC.

Supporting you with the new regime

As the date for the implementation of the changes draws closer, our VAT team are on hand to support you with any queries you may have with regards to the new penalty regime.