United Kingdom: New HMRC Penalty Scheme for Late VAT Payments

published on 21 september 2022 | reading time approx. 4 minutes

Changes to the fines and penalties levied against late VAT returns or payments will be implemented from January 2023.

The plan to reform the default surcharge system has been deferred from April 2022 to give HMRC sufficient time.

From next year, penalties and payable fines will be based on: 

• Late return penalty points
  
• Late payment financial penalties
• Interest charges

For many businesses, the deferral is welcome news since it staggers the new VAT penalty system and Making Tax Digital for VAT (MTD), which went live in April 2022.

These new rules will extend to Income Tax Self-Assessment (ITSA), although not immediately.

ITSA taxpayers subject to MTD will be brought into the new structure from 2024-25, and all others from the period after.

The Existing VAT Penalty Scheme

Currently, if you are either late with submitting a VAT return or fail to make the requisite payment on time, you are subject to a 12-month VAT surcharge period.

There is no immediate penalty on the first default, but if there is a second default within a year, you remain in a surcharge period for the next 12 months.

HMRC will not levy a penalty if you have no VAT owing, are pending a repayment, or pay your VAT liability before the deadline, and may elect not to raise a surcharge if the value in question is beneath £400.

In some cases, the surcharge is either a percentage or a fixed £30 fine, whichever is greater.

VAT Default Surcharges in 2022-23

Defaults within a surcharge period are fined as follows:

Penalties may be charged in addition to the default surcharge and can be:  

• Up to 100% of the VAT over claimed or under-declared.
• £400 for a paper return submission if you are not within a permitted category.

HMRC will not levy a VAT penalty for a nil return, even if submitted late, under the existing rules.

New Late VAT Submission and Payment Penalties

From 1st January 2023, HMRC will replace those default surcharges with a new penalty system, and the interest calculation method will also differ.

Any business that submits a VAT return for an accounting period that begins on the introduction date and thereafter will be affected.

Late VAT returns where there is nothing to declare will also now be exposed to penalty points and financial penalties if they are not submitted by the deadline.

Penalty Points for Late VAT Return Submissions

The revised scheme applies a penalty point each time a VAT return is submitted late.

If you reach a penalty threshold, you will be fined £200 and a further £200 for every late submission after that.

HMRC will assign penalty points depending on how often you submit a VAT return:

You can revert to zero penalty points if you submit all VAT returns by the due date during your compliance period and ensure all outstanding returns are submitted.

Penalty points also expire after two years, and HMRC must comply with time limits, after which it cannot levy a penalty point:

• Annual return frequency - 48-week time limit
• Quarterly return frequency - 11-week time limit
• Monthly return frequently - two-week time limit

HMRC may estimate the VAT liability if no return is submitted. There are additional penalties if a VAT-registered business accepts an underestimation and does not advise the tax office.

Late VAT Payment Penalties

Late payments are treated differently, and the penalty charges will be lower the quicker you remit the outstanding balance.

• Payments up to 15 days late will not receive a penalty provided HMRC receives the VAT payment or agrees to a payment plan before the end of day 15.
• VAT payments between 16 and 30 days late will be fined a 2% penalty based on the VAT outstanding at day 15 if a payment plan or full remittance is received.
• Accounts 31 days late or more will receive a 2% initial penalty as above, plus a further 2% penalty based on the VAT owed at day 30.

An additional penalty is calculated at 4% per day until the balance is paid or a payment plan is implemented.

HMRC will have two years to assess a financial penalty after the late payment and 12 months from the date it became aware of a previously missed submission obligation.

Interest on Late VAT Remittances

HMRC will calculate the interest on late VAT payments based on 2.5% over the Bank of England's base rate.

Interest is accumulated from the first overdue day until the account is cleared.

Initially, VAT payers will not incur late payment penalties until 31st December 2023 if the business pays the VAT in full within 30 days of the deadline.

The Introduction of VAT Repayment Interest

Along with the new penalties scheme, HMRC will pay interest on VAT repayments owing for any accounting period starting from 1st January 2023 onwards.

Repayment interest is calculated from the first day following either the submission or due date and will accrue until HMRC remits your VAT repayment.

Interest on VAT repayments will be based on the Bank of England base rate, less 1%, with a minimum rate of 0.5%.

Another change in favour of taxpayers is that HMRC will have discretion about circumstances where it decides not to apply penalty points or charge a financial penalty.

Preparing for Changes to VAT Penalties

While the new penalty system is more complex and includes various calculations with separate interest, penalties and penalty points, the outcome may be advantageous.

The existing regime means that VAT-registered businesses can be fined the same penalty, whether one day or one year late - whereas the new policy will stagger and taper charges.

There will not be an automatic fine for a late VAT return submission. Instead, taxpayers will incur points penalties, which result in a financial penalty if a certain number of points are accumulated.

Businesses also have the opportunity to reset their penalty points by demonstrating compliance and on-time VAT returns and payments for a minimum period.

When businesses cannot meet their VAT payment obligations, they have further reason to engage with HMRC and set up a Time to Pay agreement, thereby avoiding more severe penalties in the future.