Penalties for late VAT returns and payments
The UK VAT penalty regime was overhauled for VAT returns periods starting on or after 01 January 2023. Instead of being based purely on due dates, the new system is points based as outlined below.
Submission Penalties – The new points system is based on the following framework:
| Frequency of Submission | Penalty Threshold |
| Annual | 2 Points |
| Quarterly | 4 Points |
| Monthly | 5 Points |
i) Every time a VAT return submission is late HMRC will record one penalty point against the VAT registration.
ii) Once one of the penalty thresholds as above has been breached a £200 penalty will fall due.
iii) For every additional penalty point imposed a £200 penalty will fall due
iv) To reset the penalty point balance to zero the registration must have submitted all VAT return for the previous 24 months and had a period of timely VAT return submissions. This period of compliance is according to the return frequency so for:
-
- Annual submissions – the period is 24 months
- Quarterly submissions – the period is 12 months
- Monthly submissions – the period is 6 months
v) If the penalty threshold has not been breached each point expires24 months after issue
The new penalty regime is fairer by not being geared to value but to the delay itself
2. Late Payment Penalties will depend on the extent of the payment delay
- The first penalty is levied 31 days after the due date
- If a business has a ‘Time to Pay’ arrangement with HMRC all penalties are temporarily suspended.
- Soft landing for first 12 months – if payment is 30 days late there is no penalty
| 1st Penalty | 0-15 days late | No Penalty (interest as below is still due) |
| 16-29 days late | 2% of outstanding balance (but see soft-landing) | |
| 30 days | 2% of outstanding balance at day 15 plus 2% of outstanding balance at day 30 | |
| 2nd Penalty | >30 days | Penalty is calculated as a daily rate of 4% APR for duration of outstanding balance.(4% per annum – pro rata for amount of time outstanding from day 31) |
The new 15-day late payment window means no penalty for a small delay
3. Interest
- Interest is at the Bank of England base rate plus 2.5%
- Interest is charged from the due date until the date it is paid (calculated pro rata. i.e. 5.5% of outstanding balance divided by 365 multiplied by days outstanding)
- The 5% Repayment Supplement payable by HMRC on delayed refunds is being replaced for accounting periods starting from 01/01/2023 with Repayment Interest payable in line with the extent of any delay. This is calculated from day after the due date – variable Bank of England base rate minus 1% to a minimum 1.5%.
4. Other Points
If a VAT registration was in the default surcharge period under the previous penalty system when the new system started, while any liability or penalties still have to be paid, the record will be cleared to show zero points;
Appeals against penalties will be handled via the Government Gateway using either the agent or client account, and
- A record of points and a breakdown of all penalties and interest charges will be shown on the Government Gateway.
Interest is due on late payments but also paid by HMRC on delayed refunds
Soft landing during 2023
HMRC originally announced a period of familiarisation that ran for 2023 so everyone could get used to the new rules. During this period HMRC waived the first penalty that would otherwise have applied to payments made 16-30 days after the deadline. However from 1 January 2024 the penalty regime came into full effect as set out above. For 2023 what this all meant was that:
- If any amount of VAT that was outstanding was paid within 30 days there was no penalty but will be due 2024 onwards.
- If the amount due was still outstanding on day 31 the first penalty was calculated at 2% of the outstanding balance on day 15 plus 2% of the outstanding balance on day 30.
- The second penalty would be applied as outlined above.
The information contained here is based upon our current understanding of legislation and HMRC’s interpretation and therefore should not be relied upon. The rules surrounding VAT and extent of any VAT relief could be affected by future changes in the law or interpretations. Please obtain specific advice from someone who understands the rules before taking or refraining from any course of action. We will always be happy to help.