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November 11, 2022

VAT Update: Are you and your business prepared for upcoming changes to VAT penalties and VAT interest charges?

HMRC have announced changes to VAT late submission penalties, late payment penalties and VAT interest charges which businesses need to be aware of to prevent any unexpected penalty.

For VAT periods starting on or after 1 January 2023, the default surcharge will be replaced by new penalties if you submit VAT returns late or pay VAT late. The changes were initially due to implemented in April 2022 but this was delayed by a written ministerial statement by the Financial Secretary to the Treasury (this can be found here) to January 2023.

This also effects any nil or repayment VAT returns filed late. These returns will be subject to late submission penalty points.

Late submission of VAT Return - Avoid racking up the points

So how does this work, you ask?

Under this new regime, taxpayers will not automatically receive a financial penalty if they do not submit the VAT return within the deadline. Instead, late submission of VAT return penalties will work on a points-based system. Where each VAT Return you submit late you will receive one late submission penalty point.

If the penalty threshold is reached, a £200 penalty will be sent to you with a further £200 penalty for each following late submission.

Please see below the late submission penalty points thresholds. The thresholds will vary according to your submission frequency:

Submission frequency Penalty points threshold Period of compliance
Annually 2 24 months
Quarterly 4 12 months
Monthly 5 6 months

You can reset your points back to zero if:

  1. Submit your returns on or before the due date for your period of compliance — essentially ensuring that everything is submitted to HMRC within the various deadlines (this will be based on your submission frequency).
  2. Make sure all outstanding returns due for the previous 24 months have been received by HMRC.

Late payment of VAT Penalty

The sooner you pay the VAT after the due date the lower the penalty rate will be. There will be two types of penalties discussed below - fixed penalties and daily penalties.

Up to 15 days overdue

No penalty will be charged if the payment of VAT is made up to 15 days late after the relevant payment deadline.

Between 16 and 30 days overdue

If the amount is still outstanding after 15 days, a penalty of 2% of the VAT outstanding on day 15 will be due if the payment is made between 16 and 30 days.

31 days or more overdue

On top of the 2% penalty calculated at day 15, you will also receive an additional 2% on the VAT you owe at day 30. This will therefore total 4% if nothing has been paid at all.

In addition, from day 31, an additional daily penalty at a rate of 4% per year for the duration that the VAT is left outstanding.

Late payment interest

HMRC will from 01 January 2023 start to charge late payment interest from when your payment is overdue to the day your payment is made in full.

The interest percentage will be calculated as Bank of England base rate plus 2.5%.

Struggling to pay? 

HMRC have indicated that to get everyone use to the new regime, they will not charge the first late payment penalty discussed above from 01 January 2023 until 31 December 2023 if payment is made in full within 30 days of the due date.

If you are struggling to pay the VAT payments, to minimise the penalty position, the VAT return should still be filed on time and you should approach HMRC with a view to entering into a ' Time To Pay Arrangement'. If agreed, the agreement will have the effect of stopping the penalties accruing from the day they approach HMRC (provided the taxpayer keeps up with the payments).

Please contact a member of our team if you have any questions on this matter.

Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek tax advice to determine your penalty position. 

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