Points-based VAT penalties from 7 March 2023

HMRC is in the process of contacting 2.5 million businesses reminding them about new points-based penalties for late VAT returns and payment. 

The first monthly returns and payments affected by the penalties are due by 7 March 2023.

HMRC confirmed that ‘VAT customers will be subject to the new changes at different times depending on when they file their VAT returns and as such, we will be contacting them in chronological order’.

However, there will be a soft landing period so if a business misses a payment and resolves the outstanding debt within 30 days or sets up a repayment plan the penalty will be waived.

The late payment and points-based late submission penalties were introduced from 1 January 2023, replacing the VAT default surcharge, and apply to accounting periods which start on or after that date.

For late submission penalties, all taxpayers will start on zero points. This includes those on a default surcharge. Any taxpayer who is on a default surcharge will still be liable to pay any associated charges already received.

The penalties for late VAT returns also apply to businesses that submit nil returns and repayment returns. Changes have also been made to how interest is calculated.

In future, late submission penalties will work on a points-based system. For each VAT return submitted late, taxpayers will receive a penalty point until they reach the penalty point threshold, at which stage they will receive a £200 penalty.

A further £200 penalty will also apply for each subsequent late submission while at the threshold, which varies to take account of monthly, quarterly and annual accounting periods.

If a VAT payment is more than 15 days late, businesses will pay a first late payment penalty. If the VAT payment is more than 30 days overdue, the first late payment penalty increases and a second late payment penalty will also apply.

To help taxpayers get used to the changes HMRC will not charge a first late payment penalty on VAT payments due on or before 31 December 2023, if businesses either pay in full or a payment plan is agreed within 30 days of the payment due date.

HMRC will help businesses that cannot pay their VAT bill in full with arrangements to set up a payment plan to pay VAT bills in instalments.

After 31 December 2023, if a taxpayer proposes a payment plan within 15 days of payment being due and HMRC agrees it, they would not be charged a late payment penalty, provided that they keep to the conditions of the payment plan.

Late payment penalties can apply where proposals are made after the first 15 days, but the agreement of the payment plan can prevent them increasing.

HMRC has introduced both late payment and repayment interest, which will replace previous VAT interest rules. This brings the new regime in line with other taxes. Late payment interest is charged from the day after the taxpayer’s VAT payment is due until the day it is paid in full. It is calculated at the Bank of England base rate plus 2.5%, currently 6.5%.

The first late payment penalty is calculated as:

• 2% on the VAT owed at day 15 – for VAT payment between 16 and 30 days overdue;
• 2% on the VAT outstanding at day 15, plus 2% of what is still outstanding at day 30 – for payment 31 days or more overdue.

The second late payment penalty is then calculated at a daily rate of 4% per year on the outstanding balance and charged daily from day 31 until the outstanding balance is paid in full.

Paul Riley, director of tax administration, HMRC, said: ‘Our aim is to help customers get things right before monetary penalties are applied; a points-based system for late VAT returns will not punish the occasional error.

‘We are contacting 2.5 million VAT registered businesses about the changes and will continue to support customers to help them manage their tax affairs and payments.’

This is a major change to the VAT penalty system and HMRC is investing resources into communications to promote the overhaul.

It has produced a set of promotional collateral, including a sample newsletter, social media messaging and imagery, registration links for live HMRC webinars (a recording will be uploaded once live session is completed), and a link to a short overview video on YouTube.

The HMRC promotional material is available here