The plan to reform the default surcharge system, previously deferred from April 2022, is confirmed to be implemented from 1 January 2023.
From next year, VAT penalties and payable fines will be based on:
- Late return penalty points,
- Late payment financial penalties, and
- Interest charges.
Any nil or repayment VAT returns received late will also be subject to penalty points and financial penalties.
What is the existing VAT penalty scheme?
Currently, if you are late submitting a VAT return, or fail to make the requisite payment on time, you will be subject to a 12-month VAT surcharge period, with no immediate penalty on the first default. If there is a second default within 12 months, the surcharge period will remain for the next year, and penalties ranging from 2% to 15% of the VAT due will be levied.
HMRC will also not levy a penalty if you:
- have no VAT owing
- are pending a repayment
- pay your VAT liability before the deadline
HMRC may also elect not to raise a surcharge if the value in question is below £400.
The new HMRC penalty scheme will work on a points-based system for late VAT returns
For businesses with VAT periods starting on or after 1 January, the default surcharge will be replaced by new penalties if a VAT return is submitted or paid late.
For each VAT return which is submitted late, the individual will receive one late submission penalty point, and once a threshold is reached, a £200 financial penalty will be issued, with a further £200 for each subsequent late submission.
HMRC will assign penalty points for each occasion a VAT return is submitted late and will depend on how often you submit a VAT return:
| VAT Return Submissions | Penalty Points Threshold | Compliance Period |
| Annual | Two | Two years |
| Quarterly | Four | One year |
| Monthly | Five | Six months |
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.
Late VAT payments are treated differently…
For late payment penalties, the sooner you pay, the lower the penalty rate will be.
- Payments up to 15 days late will not receive a penalty, provided HMRC receives the VAT payment or agrees 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 outlined above, plus further 2% penalty based on the VAT owed at day 30. An additional penalty of 4% per day for the duration of the outstanding balance, calculated when the balance is paid in full, or a payment plan is agreed
Interest charges
Alongside the changes to the penalty system, HMRC will charge interest on VAT repayments outstanding for any accounting period starting 1 January 2023 onwards.
Late payment interest is calculated as the Bank of England base rate plus 2.5%.
Period of familiarisation
To allow time to get used to the changes, HMRC will not be charging a first late payment penalty for the first year (from 1 January to 31 December 2023), if full payment is made within 30 days of the due date.
Get in touch
As with any new system, there could be teething problems in the new year, and we would advise all businesses to take advice if they believe a surcharge has been issued or calculated incorrectly. If you want to discuss the new penalty VAT regime in more detail and how it may affect your business, please get in touch with Andy Kirkaldy by using the button below.
