Changes to HMRC penalties and interest

Changes to VAT penalties and interest

New penalties for submitting VAT returns or paying VAT late came into effect on 1‌‌‌ ‌‌January 2023, and in the last month, we have started to see HMRC issue penalty correspondence to our clients.

What has changed?

The new penalties replace the old default surcharge regime, whereby if a VAT Return was received late or not paid in full by the due date, you would enter a default period.

Once in a default period, if you defaulted again in the next 12 months a surcharge notice would be issued starting at 2% of the VAT due, then progressing to 5, 10 and 15% for successive defaults. Some de minimis limits applied, and the surcharges were based on the VAT owed, meaning that nil or repayment VAT returns attracted no charge.

The new penalties replace the default surcharge and now also apply to those who submit nil or repayment returns.

To avoid penalties, you must now:

• submit your VAT returns on time using software that is compatible with Making Tax Digital such as Xero (unless you are exempt from Making Tax Digital)
• pay your VAT on time 

What happens if you submit a VAT return late?

For VAT periods starting on or after 1‌‌‌ ‌‌January 2023, penalties for submitting VAT returns late work on a points-based system. One penalty point is given for each VAT return submitted late.

If you reach your points threshold, you will have to pay a fixed £200 penalty. You will also have to pay another £200 penalty each time you submit your VAT return late while you are at the threshold. Your points threshold will depend on how often you need to submit a VAT return. If your VAT accounting period is annual, the penalty point threshold is 2. If your VAT accounting period is quarterly, the penalty point threshold is 4. If your VAT accounting period is monthly, the penalty point threshold is 5.

Penalty points expire automatically or are removed differently depending on whether or not you have reached the threshold in your accounting period. The following link has information on how to remove penalty points you’ve received after submitting your VAT return late.

You can find more information on how late submission penalties work here.

What happens if you do not pay your VAT on time?

If your payment is more than 15 days overdue, you will have to pay a first late payment penalty. If your payment is more than 30 days overdue, you will also have to pay a second late payment penalty.

You can find more information about how late payment penalties work and how to avoid them on GOV‌‌‌.UK.

You will also be charged late payment interest from the day after your VAT payment is due, to the day you pay in full. Interest will be calculated at the Bank of England base rate plus 2.5%. You can find more information about how late payment interest works on GOV‌‌‌.UK.

There is a soft landing period for the first year to help taxpayers get used to the new penalty system year, so HMRC won’t charge a first late payment penalty on VAT payments due on or before 31‌‌‌ ‌‌December 2023, providing you either:

• pay in full within 30 days of your payment due date
• ask HMRC for a payment plan within 30 days of your payment due date and they agree to it