VAT Penalties are changing: don’t get caught out

VAT: Ensors

Previously, if a deadline was missed you entered a 12 month ‘default period’.  If you then missed the deadline for a second time within the default period, a surcharge was payable, which increased with each additional late submission.

The new system which applies to VAT accounting periods beginning on, or after 1 January 2023, works on a points basis. For each VAT return submitted late, you will receive one penalty point, and once the penalty points threshold is reached a fixed penalty of £200 is charged.  The threshold depends on the frequency of VAT submissions; it’s five points for monthly filers, four points for quarterly returns, and two for annual returns.

Penalties for late filing

Similar to points on your driving license, if penalty points don’t exceed the threshold, they will ordinarily expire after 24 months.  However, once the penalty threshold is met, points will not expire and a further £200 penalty will be issued for each additional late submission.  Points will only expire once all returns and payments have been submitted on time for a set period of compliance; six months for those filing monthly, 12 months for quarterly filers, and 24 months for an annual return.

Also, in a significant change from current arrangements, penalties will apply to nil returns and those where a repayment is due. These previously escaped a penalty which has meant that businesses in this position often got into the habit of submitting late returns, so now is the time to bring all submissions up to date.

Penalties for late payment

Turning to the late payment of VAT, penalties will not be charged where full payment is made within 15 days of the deadline.  Between 16-30 days late, the penalty will be 2% of the VAT outstanding on day 15.  Over 31 days, the penalty is increased by 2% of the VAT outstanding on day 30, plus a second penalty at 4% pa for the duration of the balance.  Penalties are calculated once payment is made.

Interest will apply for all late payments, currently at 2.5%, and calculated from the due date to the date payment is made.  For repayments, the current repayment supplement is withdrawn, and replaced by repayment interest calculated from the day after the due date, or the date of submission – whichever is later – until the day HMRC pays you the amount due.  The rate is set as the Bank of England base rate minus 1%, subject to a minimum rate of 0.5%.

Time to Pay Arrangements (TTP) will still be available, and will stop the clock on penalties and interest accruing.  However, breaching the agreed terms of the TTP will mean penalties and interest are charged as if it was never in place, so it’s vitally important to take note of the conditions.