A new points-based penalties regime will impact businesses who submit their VAT returns or pay their VAT late. The first monthly returns and payments affected by the penalties were those due by 7 March 2023.
The new late payment penalties and points-based late submission penalties were introduced from 1 January 2023, replacing the VAT default surcharge, and apply to accounting periods which started on or after that date. The penalties for late VAT returns also apply to businesses that submit nil returns and repayment returns. Changes have also been made to how interest is calculated.
The changes to VAT penalties and interest payments are:
Late submission penalties
These work on a points-based system. For each VAT return submitted late, HMRC customers will receive a penalty point until they reach the penalty point threshold – at which stage they will receive a £200 penalty. A further £200 penalty will also apply for each subsequent late submission while at the threshold. The threshold varies to take account of monthly, quarterly and annual accounting periods. For those making quarterly returns, the threshold is 4 points, for monthly filers it is 5, and for annual filers it is 2.
Late payment penalties
If a VAT payment is more than 15 days overdue, businesses will pay a first late payment penalty at 2% of the debt at day 15. If the VAT payment is more than 30 days overdue, the first late payment penalty increases by 2% of the debt at day 30, and a second late payment penalty will also apply. This is effectively an interest charge applied from day 31 at an annual rate of 4%. To help customers get used to the changes, HMRC will not charge a first late payment penalty on VAT payments due on or before 31 December 2023, if businesses either pay in full or a payment plan is agreed within 30 days of the payment due date.
HMRC will help businesses that cannot pay their VAT bill in full. HMRC customers may be able to set up a payment plan to pay their bill in instalments.
After 31 December 2023, if a HMRC customer proposes a payment plan within 15 days of payment being due and HMRC agrees it, they would not be charged a late payment penalty, provided that they keep to the conditions of the payment plan.
Late payment penalties can apply where proposals are made after the first 15 days, but the agreement of the payment plan can prevent them from increasing.
HMRC has introduced both late payment and repayment interest, which will replace previous VAT interest rules. This brings the new regime in line with other taxes.