A new VAT penalty regime came into effect on 1 January 2023. The new regime applies to the late submission and/or late payment of VAT returns for VAT return periods beginning on or after 1 January 2023. 

How does the new VAT penalty regime work?

Under the new system, there are penalties for late VAT returns, late payment of VAT, and a new methodology to the way interest is charged. This will replace the default surcharge regime and should represent a fairer system for most taxpayers.

Point Based System

The new system is points-based. This means that taxpayers will incur a penalty point for each missed submission deadline. At a certain threshold of points, a financial penalty of £200 will be charged, and the taxpayer will be notified.

The threshold varies depending on the required submission frequency (monthly, quarterly, annual):

• For annual VAT returns, the penalty points threshold is 2 points
• For quarterly VAT returns, the penalty points threshold is 4 points.
• For monthly VAT returns, the penalty points threshold is 5 points.

The penalty points will reset to zero following a period of compliance:

• Annual VAT returns require 2 months of compliance
• Quarterly VAT returns require 12 months of compliance.
• Monthly VAT returns require 6 months of compliance

A period of compliance is when you submit all your returns on time. There are also time limits after which a point cannot be levied. 

The new late payment penalties

In addition, the new system will see the introduction of two new late payment penalties.

A first payment penalty of 2% of the unpaid tax that remains outstanding 16-30 days after the due date.

The second payment penalty increases to 4% of any unpaid tax that is 31 or more days overdue.

To help with the introduction of the new system, HMRC has confirmed that it will not be charging a first late payment penalty for the first year of the new regime

(1 January - 31 December 2023) once the debt is paid in full within 30 days of your payment due date.

Late payment interest will be charged from the date payment is overdue until the date it is paid in full. Late payment interest is calculated as the Bank of England base rate plus 2.5%.

If you would like more advice and assistance with the VAT returns, please contact us at info@gkaccountingservices.com or call us on 01269 508 081, where we will be more than happy to answer any of your questions.