How To Avoid Costly Mistakes: Navigating HMRC’s New VAT Penalties For Late Payments

For VAT return periods beginning on or after 1 January 2023, HMRC has replaced their current VAT default surcharge with a new penalty regime. The new system separates penalties for late submission of returns and for late payment of VAT. HMRC has also changed the way it charges and pays interest to taxpayers.

Penalties for late filing of VAT returns

If a VAT return is not filed by the deadline for that return, the business will be awarded one penalty point.

A £200 penalty will be issued once a points threshold is reached, with a further £200 penalty for each late filing thereafter.

HMRC will assign penalty points depending on how often you submit a VAT return:

Points will expire if the business does not reach a points threshold and all returns are filed on time in the two year period since the point was incurred.

If the business has reached a threshold, points will only be removed subject to meeting set conditions.

It is important to note, that, unlike the default surcharge, the new system penalises late returns even if they are ‘nil’ or repayment returns.

Penalties for late payment of VAT liabilities

There is a significant change in respect to late payments which has made the penalty more proportionate to the offence.

• Late payment up to 15 days overdue

Whereas the default surcharge imposed the maximum penalty from day one, the new approach provides leniency for the first 15 days that the VAT remains outstanding.

• VAT payment is between 16 and 30 days overdue

After 16 days, a 2% penalty is applied calculated on the VAT owed at day 15.

• VAT payment is 31 days or more overdue

If payment remains outstanding in full or in part after 31 days, another 2% penalty is calculated on the amount outstanding at day 30.

A further penalty based on a daily rate of 4% per year will be  added to the outstanding balance every day from day 31 until the outstanding balance is paid in full, or once a payment plan has been agreed.

Filing your returns and paying VAT on time is the best way to avoid extra costs, but if you can’t afford to pay your VAT bill, it is best to file your return on time (to avoid the £200 penalties) and to then engage with HMRC and discuss the possibility of establishing a Time To Pay Agreement.

Grace period whilst businesses get used to the new VAT rules

HMRC will not charge a first late payment penalty until after 31 December 2023, provided that the business pays the VAT due, or makes a Time to Pay arrangement within 30 days of the due date.

Interest charges

In the past, HMRC didn’t charge interest as the default surcharge was considered inclusive of both penalty and interest charges. Going forward, where VAT or penalties are paid late, interest will be added to any outstanding amount from the first day the payment becomes overdue until it is paid in full.

The interest rate is calculated at the Bank of England base rate plus 2.5%.

If HMRC is late in repaying VAT amounts owed, the taxpayer may be entitled to an award of repayment interest. For accounting periods starting on or after 1 January 2023, repayment interest replaces the repayment supplement.

Repayment interest is calculated at the Bank of England base rate minus 1%, with a minimum rate of 0.5% even if the repayment interest calculation results in a lower percentage.

How can we help?

Scrutton Bland’s team of experienced expert VAT advisers can help you understand these changes in more detail to ensure that your business is compliant with the VAT rules. To get in touch to discuss this with one of the team please call Daniel May on 0330 058 6559 or by emailing hello@scruttonbland.co.uk