New penalty points system for VAT late payments and returns

The current VAT default surcharges were due to finish in March 2022, but were extended until the end of the year while HMRC prepared its IT system for the changeover. Assuming there are no more hold ups, the two new penalty systems for VAT late payments and returns will come into force on 1 January 2023.

Let’s take a look at each of the systems in turn…

Submitting late VAT returns

The aim of the new penalty points system is to be less harsh on taxpayers who might miss the odd deadline, with more severe penalties for repeat offenders. HMRC will record one point against you every time a filing deadline is missed. Once you reach a certain threshold, you will receive a £200 penalty charge. If you miss another deadline, it will trigger a further penalty but you will not receive more points providing you pay the fine.

The penalty thresholds are two points for annual VAT returns, four points for quarterly returns and five points for monthly returns. The penalty points will stay on your record for a set period, and will be wiped off if you submit your returns on time. These periods depend on your returns frequency: 24 months for annual, 12 months for quarterly and six months for monthly.

By the way, HMRC is planning to introduce similar systems across all taxes as part of the transformation to making tax digital (MTD).

Late payment of VAT

This part of the points system is divided into two parts: fixed and daily penalties. Essentially, the later the payment the higher the penalty.

Payments up to 15 days overdue are allowed, but payments between 16 and 30 days late will incur a 2% penalty (of the amount outstanding). However, HMRC recognises that some businesses might need time to understand the new system, so will not apply these rules in 2023 unless payments are more than 30 days overdue.

Payments that are more than 30 days late will receive an extra 2% penalty based on the total amount outstanding at day 30 (basically 4% if nothing is paid). Starting from day 31, a daily penalty kicks in (4% per year on the total outstanding). For example, if a company leaves its VAT unpaid for 13 months the penalty charge will be 8%.

Please be aware that interest on overdue tax will be charged at Bank of England base rate plus 2.5%.

What can I do if I cannot afford to pay my VAT?

Hopefully the new system will encourage businesses to file their returns and pay their VAT on time. However, anyone struggling to pay their VAT bill should still file their return on time and then ask HMRC for a Time To Pay Agreement. Providing an instalment payment plan is agreed, the interest charges on overdue payments are frozen and will not be enforced as long as planned payments are made.

Can I appeal?

Businesses retain the right to appeal a late filing or late payment penalty within 30 days of being notified by HMRC. You can either ask HMRC to do an internal review of the decision, or submit an appeal to the First-tier Tax Tribunal. 

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