How VAT penalties work for late payment and submission:
A new VAT penalty regime was introduced from 1st January 2023 moving VAT registered businesses away from default surcharge periods and instead using a points-based system for the non-submission of returns.
Late payments will also be penalised differently with the charge levied being based on the length of time the tax remains outstanding.
The penalty process will be in place for all VAT periods beginning on or after 1st January 2023.
Late Submission – How it is penalised:
The system is only in force for those taxpayers who make regular submissions through MTD. This also includes nil or repayment returns.
For each return that is filed late you will receive one penalty point which HMRC will notify you of. Once the penalty threshold is reached a £200.00 penalty will be levied.
The threshold is determined by how often the returns are filed.
- Annually 2 points
- Quarterly 4 points
- Monthly 5 points
A VAT registered business must therefore make four late submissions to receive a penalty. For each subsequent late submission, a further £200.00 penalty is applied but the points do not increase.
In order to reset the points, two requirements must be met.
- All VAT returns for the preceding 24 months must be filed.
- A period of compliance with the submission deadlines since the last penalty levied. The periods are as follows:
- For annual submissions 24 months
- For quarterly submissions 12 months
- For monthly submissions 6 months
Therefore, if you file quarterly, returns must be filed on time for a period of 24 months from the last period a penalty was levied against in order to reset the points to nil.
Returns that are not affected:
The late submission penalty rules do not apply to your:
- first VAT return if you’re newly VAT registered
- final VAT return after you cancel your VAT registration
- one-off returns that cover a period other than a month, quarter or year
Late Payment – How it is penalised:
No penalties are levied if a taxpayer pays any outstanding tax up to 15 days from the due date. Once this period passes a penalty notice will be issued. If after a period of 31 days payment has still not been made, a second penalty notice will be issued.
| First late payment penalty | Second late payment penalty | |
| Payment up to 15 days overdue | None | None |
| Payment between 16 and 30 days overdue | Calculated at 2% on the VAT you owe at day 15. | None |
| Payment 31 days or more overdue | Calculated at: • 2% of what was outstanding at day 15 • plus 2% of what is still outstanding at day 30 | Calculated at •4% per year on the outstanding balance calculated on a daily basis •charged everyday from day 31 until the outstanding balance is paid in full |
It is important to note that the penalties are not just associated with the return filed. They can also be levied in the following circumstances.
- following an amendment to a return or correction
- from a VAT assessment HMRC issue when a return is not filed on time.
- from a VAT assessment HMRC issue for any another reason
If the liabilities cannot be settled then it is in the interest of the taxpayer to communicate with HMRC as they have stated that if they ‘agree a Time to Pay arrangement with you, it can mean lower, or no, late payment penalties. It can cover all outstanding amounts due, including penalties and interest’.
Moving forward:
Looking forward to the 2024/25 tax year, the new penalty regime will come into force for income tax via the self-assessment tax return process for those mandated for Making Tax Digital (MTD).
HMRC have stated that the new penalty system will make them fairer and more consistent across taxes. What do you think?
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