Be prepared for new VAT penalties from 1 January 2023

For VAT periods starting on or after 1 January 2023, HMRC is replacing the default surcharge with separate penalties for late returns and late payment of VAT.  At the same time, HMRC is introducing a new approach to charging interest on late-paid VAT.

The new points-based system for late submissions is designed to be more lenient for the occasional slip-up, whilst still penalising those who repeatedly fail to comply.  It will operate in a similar way to the penalty points system for motoring offences.  Also, like the system for motoring penalties, the points expire after a period of time.

If your business submits its return late (which also applies if you submit a nil or repayment return late), you could face penalty points and a £200 fine.

If you submit your VAT return late

Late submission penalties will work on a points-based system.

For each VAT Return you submit late, you will receive one late submission penalty point.

Once a penalty threshold is reached, you will receive a £200 penalty and a further £200 penalty for each subsequent late submission.

The late submission penalty points threshold will vary according to your submission frequency.

You will be able to reset your points back to zero if you:

•  submit your returns on or before the due date for your period of compliance — this will be based on your submission frequency

• make sure all outstanding returns due for the previous 24 months have been received by HMRC

If you do not pay your VAT on time

For late payment penalties, the sooner you pay the lower the penalty rate will be.

Up to 15 days overdue

You will not be charged a penalty if you pay the VAT you owe in full or agree a payment plan on or between days 1 and 15.

Between 16 and 30 days overdue

You will receive a first penalty calculated at 2% on the VAT you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.

31 days or more overdue

You will receive a first penalty calculated at 2% on the VAT you owe at day 15 plus 2% on the VAT you owe at day 30.

You will receive a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full or a payment plan is agreed.

Period of familiarisation

To give you time to get used to the changes, HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if you pay in full within 30 days of your payment due date.

How late payment interest will be charged

From 1 January 2023, HMRC will charge late payment interest from the day your payment is overdue to the day your payment is made in full.

Late payment interest is calculated as the Bank of England base rate plus 2.5%.

Introduction of repayment interest

The repayment supplement will be withdrawn from 1 January 2023.

For accounting periods starting on or after 1 January 2023, HMRC will pay you repayment interest on any VAT that you are owed.

This will be calculated from the day after the due date or the date of submission (whichever is later) and until the day HMRC pays you the repayment VAT amount due to you in full.

Repayment interest will be calculated as the Bank of England base rate minus 1%. The minimum rate of repayment interest will always be 0.5% even if the repayment interest calculation results in a lower percentage.