The new VAT penalty regime for VAT periods starting on or after 1 January 2023

The default surcharge will be replaced by new penalties if you submit VAT returns late or pay VAT late.

There will also be changes to how VAT Interest is calculated.

The changes will affect everyone submitting VAT Returns for accounting periods starting on or after 1 January 2023.

Any nil or repayment VAT returns received late will also be subject to late submission penalty points and financial penalties.

If you submit your VAT return late

Late submission penalties will work on a points-based system.

For each VAT Return you submit late you will receive one late submission penalty point.

Once a penalty threshold is reached, you will receive a £200 penalty and a further £200 penalty for each subsequent late submission.

For most businesses who lodge quarterly VAT returns, the threshold is 4 points, being 4 quarterly VAT returns submitted late.

For those businesses who lodge monthly VAT returns, the threshold is 5 points, being 5 monthly VAT returns submitted late.

To reset the points, you must meet a test of good compliance (i.e. submitting everything on time) for a specified period and submit any outstanding returns due in the prior 24 months.

The good compliance period will depend on your return cycle: it will be 24 months for organisations filing Annual returns, 12 months for Quarterly returns and 6 months for monthly filers.

If you do not pay your VAT on time

The new system will apply in two stages, fixed penalties, and daily penalties: basically, the later the payment is the higher the rate of penalty charged.

Up to 15 days overdue
You will not be charged a penalty if you pay the VAT you owe in full or agree a payment plan on or between days 1 and 15.

Between 16 and 30 days overdue
You will receive a first penalty calculated at 2% on the VAT you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.

31 days overdue
You will receive a first penalty calculated at 2% on the VAT you owe at day 15 plus 2% on the VAT you owe at day 30 if you pay in full or agree a payment plan on or after day 31.

More than 31 days overdue
You will receive a first penalty calculated at 2% on the VAT you owe at day 15 plus 2% on the VAT you owe at day 30.

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

Period of familiarisation

To give businesses time to get used to the changes, HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if you pay in full within 30 days of your payment due date.

How late payment interest will be charged

From 1 January 2023, HMRC will charge late payment interest from the day your payment is overdue to the day your payment is made in full.

Late payment interest is calculated as the Bank of England base rate plus 2.5%.

Introduction of repayment interest
The repayment supplement will be withdrawn from 1 January 2023.

For accounting periods starting on or after 1 January 2023, HMRC will pay you repayment interest on any VAT that you are owed.

This will be calculated from the day after the due date or the date of submission (whichever is later) and until the day HMRC pays you the repayment VAT amount due to you in full.

Repayment interest will be calculated as the Bank of England base rate minus 1%. The minimum rate of repayment interest will always be 0.5% even if the repayment interest calculation results in a lower percentage.’
https://www.gov.uk/guidance/prepare-for-upcoming-changes-to-vat-penalties-and-vat-interest-charges

How to avoid penalties

Obviously, filing returns and paying VAT on time is the best way to avoid extra costs.

However, if you can’t afford to pay your VAT bill, it is still best to file your return on time and approach HMRC for a Time To Pay Agreement. If an instalment payment plan is put in place, the standard interest charges on late payments are frozen from that day and will not be enforced if you stick to the payment plan.

If you have any questions, a member of our tax team would be happy to help. Give us a call on 01246 274121 (Option 2) or drop us an email: taxteam@mitchellsaccountants.co.uk