HMRC new VAT penalty regime

Introduction of the HMRC new VAT penalty regime

Introduction of the HMRC new VAT penalty regime

HMRC has released further details of the new penalty regime for income tax self-assessment returns and VAT returns. We have summarised the changes and how they will impact businesses from when the new regime takes effect.

HMRC have confirmed that for VAT periods starting on or after 1 January 2023, new penalties will replace the default surcharge if you submit VAT returns late or pay VAT late. The aim is to simplify the current penalty regime and make the process fair and effective.

Late submissions penalty

The new points-based system will replace the default surcharge, where each delayed return will attract one penalty point.

The points will expire after two years, subject to certain conditions being met. This is particularly favourable for taxpayers who miss the occasional deadline.

If you have a continuous period of non-filing, you will reach a penalty threshold, after which a £200 penalty will be charged. All subsequent late filings will trigger a penalty.

Penalty thresholds

The late submission penalty points threshold will change according to your submission frequency, as illustrated in the table below

Monthly VAT returns 5 points
Quarterly VAT returns 4 points
Annual VAT returns 2 points

Resetting points

Penalty points will not expire automatically like your driving licence. To reset the points, you have to meet the “test of good compliance”, which includes submitting your VAT returns on time and submitting any outstanding returns due in the following manner:

Monthly VAT returns 6 Months
Quarterly VAT returns 12 months
Annual VAT returns 24 months

Late payment penalty

The new system will attract two types of penalties

  1. Fixed penalties
  2. Daily penalties

If payments are made up to 15 days late, they will not attract a penalty. The late payment penalty will be charged from day 16 to day 30 at a rate of 2% on the amount outstanding. Any payments due after day 30 will attract an additional 2% penalty of the amount outstanding.

A second daily penalty will incur if the VAT is still outstanding after day 31 up until the day when full payment has been made. This penalty will be at a rate of 4% per annum on the amount outstanding.

Late payment interest

For VAT periods starting on or after January 1, 2023, HMRC will charge late payment interest from the day the payment is overdue until it has been paid in full. Any late payments will attract interest at a rate of 2.5% + the Bank of England base rate. Interest will continue to accrue even if a time-to-pay arrangement has been made with HMRC. Late payments interest will also apply to late submission and late payment penalties if they are paid after 30 days

Repayment interest

For VAT periods starting on or after January 1, 2023, HMRC will repay interest on any overpaid tax or repayments. The repayment interest is calculated from the day after the due date or the date of submission, whichever is later, until the date a repayment is issued. The rate is calculated as the Bank of England base rate minus 1%. The minimum rate will be 0.5%.

HMRC new VAT penalty regime

Frequently asked questions

Any VAT return with a period starting on or before 31 December 2022 will fall under the current default surcharge penalty system and will, therefore, not receive a late submission penalty under the new penalty system
Yes, the taxpayer will receive a notification. You can also view your points on your online account for your organisation
Yes. The rules also apply to nil and repayment returns
The points relate to late submissions only
If the filing frequency changes, this will change the points threshold, and any points incurred will be adjusted in line with the customer’s new filing frequency. This ensures that a customer’s position remains the same regarding the number of failures away from a financial penalty
HMRC’s long-term plan is to introduce the new penalties to other taxes, but timescales for this have not yet been confirmed
Taxpayers will get a reminder three days after the payment due date asking them to pay. If it remains unpaid, then penalties apply on day 15 and day 30
The period of familiarisation with be for one year and runs from 1 January to 31 December 2023 For VAT periods starting on or after 1 January 2023, HMRC will repay interest on any overpaid

Further information on the new penalty regime can be found here. If you want to discuss this further, you can book a free 30-minute consultation here.

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