The new VAT penalties and interest regime

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13 September 2022

The new VAT penalties and interest regime

HMRC are changing the penalties and interest regime for late submission of VAT returns and late payment of VAT liabilities for periods starting on or after 1^st January 2023. These changes will affect everyone, regardless of the VAT scheme you are on.

The good

If you are in a position where HMRC owe you VAT back, they will also be paying you interest on this.

The interest is the bank of England base rate less 1%, with a minimum of 0.5%. This is calculated from the day after the due date or submission date of the return up until HMRC repay you.

The bad

Late submission penalties will work on a points-based system. For each VAT return submitted late you will receive one penalty point.

Once a penalty threshold has been reached (HMRC have not yet confirmed the threshold), a £200 penalty will be charged, for each subsequent late return a further £200 will be charged.

There is some good news though. You can reset your points back to zero if you do the following:

Submit your returns on or before the due date.
Make sure all outstanding returns due for the previous 24 months have been submitted.

The ugly

From 1 January 2023 late payment interest will be charged at the bank of England base rate plus 2.5%.

A new system has also been introduced for late payment of VAT liabilities, with a percentage-based penalty regime introduced.

Time Overdue	Penalty
Up to 15 days	There is no penalty if the VAT owed is paid in full or if a payment plan is agreed on or between days 1-15.
16 - 30 days	The first penalty is calculated at 2% of the VAT owed at day 15 if VAT is paid in full or a payment plan is agreed between days 16-30.
31 days or more	The first penalty is calculated at 2% on the VAT owed at day 15, plus 2% on the VAT owed at day 30. A second penalty is 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 if a payment plan is agreed.

This is chargeable from the day the payment is overdue.

To summarise

Failure to submit VAT returns or pay HMRC by the due date could become costly, especially with the current threat of the bank of England increasing the base rate further.

With only a few months to go until 1^st January 2023, it’s important to ensure you are up to date with your VAT procedures.

More detailed guidance about the changes to VAT late submission penalties, late payment penalties and VAT interest charges will be published by HMRC in December 2022. For now, you can read more on their website here.