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New Penalty Regime for VAT from 1st January 2023

A new penalty regime for VAT started on January 1st 2023. We outline what has changed and how you can avoid a late VAT payment penalty.

What changed on 1st January 2023?

Business owners and Directors are advised that a new penalty regime for VAT started on January 1st 2023.

The new VAT penalty regime replaces the default surcharge system which previously applied to the late submission and payment of VAT.

The change is likely to be well received as the previous system was criticised for imposing harsh penalties on submission delays or minimal VAT payment.

You should note that failures relating to VAT returns and VAT payments for periods starting before 1st January 2023 will still be dealt with under the default surcharge regime and the old interest rules.

Penalties relating to other VAT disclosures and error corrections will also be subject to the previous rules and whether HMRC determines that the errors were concealed or disclosed, and careless or deliberate.


1. Late submission of returns penalties

The new penalty regime is based on a points system.

If a taxpayer misses a VAT return filing deadline, they will receive a penalty point. Once a specified number of points has been accrued, the taxpayer will be charged a £200 penalty for each failure to file on time.

The number of points required for a penalty to be charged depends on your frequency of VAT returns (5 points for monthly returns, 4 points for quarterly returns, 2 points for annual returns).

Unlike the previous surcharge regime, penalties will also be applied to nil VAT returns and late repayment of VAT.

2. Late payment penalties

Under the new VAT penalty regime there are now two penalty charges for late payment of VAT.

The first charge is a 2% penalty for VAT not paid by the end of days 15 and 30 after the due payment date.

A second late payment penalty is then calculated at a daily rate of 4% per annum on any VAT still outstanding from day 31 until the VAT is paid in full.

The second penalty will be cancelled when the outstanding VAT is paid in full or if Time to Pay arrangements are accepted by HMRC.

To clarify, there will be no penalty if the VAT due is paid in full up to 15 days after the due date or the taxpayer contacts HMRC up to 15 days after the due date to arrange a Time to Pay agreement.

Late payment interest will be charged on any payments made after the due date and will be charged at the annual rate of 2.5% above the Bank of England base rate.

Please note that a grace period on the new penalties is available until 31st December 2023. During this time, no penalty will be charged if all VAT owed on a return is paid within 30 days of the due date.

Man using calculator

How can you avoid a late VAT payment penalty?

The simplest way to avoid a late VAT payment penalty is to set up a direct debit with HMRC that enables them to collect any necessary VAT payment 2-3 working days after the due date.

What if you cannot make the full VAT payment required?

Even if you cannot make the necessary VAT payments on time you should still make sure you submit your VAT returns on time.

If cashflow is a problem and you cannot pay in full, then you are able to make part payments. However, you should try to pay what you can by the end of day 15 as that is when penalties will be charged based on the VAT owed.

If you think that you’ll struggle to pay the VAT owed, you should contact HMRC as soon as possible to agree a Time to Pay arrangement. No penalty will be applied once HMRC has accepted your Time to Pay arrangement.

Penalties on late VAT payments can also be avoided if you can provide HMRC with a reasonable excuse, but this must be a last resort as there are very few excuses that will be accepted by HMRC.

VAT enquiry?

If you have any questions about the new penalty regime for VAT or if you have a specific VAT enquiry, get in touch with us today and we will give you the advice you need.

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