The New VAT Penalties for Late Payments

HMRC is rolling out a new VAT penalty scheme to come into effect for all submissions for accounting periods that start from 1st January of 2023.

Many of you may already be aware of this new penalty system. In fact, you might even know that it was originally due to come into effect in April of 2022 but was pushed back. 

It comes as a new form of ensuring all businesses and organisations pay their VAT on time without considerable punitive charges. 

The previous “VAT default surcharge regime” was initially scheduled to end on 31st March but has been pushed to 31st December. The change came to both allow businesses to prepare and let HMRC’s IT systems have the necessary changes applied in an effective and efficient manner. 

Here’s what you need to know:

It will affect you if you’re VAT registered

If your business works closely with an accountant and is already on time with the submission of VAT returns and payments, this won’t apply to you. However, if you believe there may be a chance in the future that you will submit your return late or may not have the account preparation for the repayment of VAT to HMRC, then this will apply. 

All VAT-registered companies across the UK are subject to these incremental interest charges on the late reporting or repayment of VAT.

The VAT late submission penalty is changing too

It is not just a new penalty for late payments of VAT. If, for any reason, a VAT submission deadline is missed, this will see penalty charges, too. 

The changes involve a points-based system that accrues one point with every missed deadline. Then, after accruing a set amount of points, you will hit a penalty fee threshold of £200 plus another £200 for every late submission after that. 

If you submit your VAT returns annually, you will have a threshold of 2 points before the penalty. If you submit quarterly, the threshold is 4 points. Then, if you submit monthly, the threshold is 5 points. However, you can reset your accrued points to zero if you submit before the period of compliance. This is 24 months for annual VAT returns, 12 months for quarterly returns and 6 months for monthly returns.

There are three late payment penalty charges

There are three penalty charges that you could receive. Each late payment VAT penalty charge is derived from a duration-based system.

The First Penalty Charge, Days 1-15 – The day after your payment deadline is missed, the clock will begin. You have 14 days to repay HMRC owed VAT without a financial penalty charge but with a late payment on record.

The Second Penalty Charge, Days 16 to 30 – After day 15, you will be charged 2% interest on the VAT you owe. If you pay between days 16 and 30, this will be the only additional charge you will incur.

The Third Penalty Charge, Days 31 Beyond – After 31 days of no payment, you will receive an additional 2% interest rise (to total 4%) on a daily rate charged on a yearly basis. This is added until you’ve settled the debt or set up a payment plan.

There will be a period of familiarisation

Even though the new VAT penalties for late submission and late payment are set to begin on 1st January 2023, HMRC is giving all businesses a “period of familiarisation”. This is to provide leeway to businesses that may not be fully prepared by the deadline.

HMRC has said they will not charge businesses the late VAT payment penalty if they pay within the first 30 days past the deadline. In other words, both the first and second penalty charges are being removed for the first VAT payment deadline. So, you have an additional 30 days to accrue and repay owed monies without seeing a penalty charge.

You can request a time-to-pay arrangement

If you’ve submitted your VAT return but you’ve surpassed your VAT payment date, you can request a “Time-to-Pay” (TTP) arrangement. Which, when it has been accepted, will stop the clock on any further penalty charges being sent in your business’ direction.

The day you request a TTP arrangement will be treated as your repayment date if the application is accepted. 

However, one thing to note is that if – for any reason – your application is denied or the terms of the TTP arrangement are broken by you, the clock will resume as though there was never a request for a TTP arrangement!

And that sums up everything there is for you to know about the new HMRC VAT late payment penalty. For now, it’s best to speak with your accountant to ensure your business is in a secure position to meet new deadlines and avoid any penalty points or charges. 

We will have another update about these new penalties, points and interest charges in December. So, be sure to revisit our website to learn more.

Please call +44(1244) 220-062, or visit our Tax services page, if you need help with submitting your VAT return.