Previously, if you missed a VAT submission deadline, HMRC would issue an automatic fine / penalty.  This has now changed and increased in complexity – There are now three elements to consider: Penalty points for late filing; Penalty charges for late payment and Interest charges for late payment.

To help you navigate this rather complex system,  please refer to our detailed guide below:

Penalty Points – Late Filing of VAT Returns

For VAT accounting periods starting on or after 1st January 2023, late submission penalties will work on a points-based system.

  • For each return submitted late (this includes nil or repayment returns) you will receive 1 penalty point.
  • Once you reach the penalty point threshold, you will receive a £200 penalty.
  • You will then receive a further £200 penalty for each subsequent late submission while you are at the penalty point threshold.

What is your Penalty Point Threshold?

The threshold depends on how often you submit VAT returns:

  • Annually = 2 points.
  • Quarterly = 4 points.
  • Monthly = 5 points.

What if I take over a VAT registered business?

If you take over a VAT registered business as a “going concern” any penalty points built up by the business will not be transferred to your VAT registration number.  This will be the case even if the VAT registration number is transferred from the previous owner.

VAT returns not affected:

The late submission penalty rules do not apply to your:

  • First VAT return if you are 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.

How do I know how many penalty points my business has?

You can check details of penalties in your VAT account through your Gateway account.

If you cannot use your Gateway account or do not have one set up, write to HMRC requesting a review of your penalty points: Solicitor’s Office and Legal Services, HMRC, BX9 1ZT.

How are Penalty Points removed?

When penalty points expire depends on the date your return was due.

If the deadline for your return was:

  • Not the last day of a month – a penalty point expires on the last day of the month, 24 months after this.
  • The last day of a month – a penalty point expires on the last day of the month, 25 months after this.

Monetary Penalties – Late Payment of VAT

  • If a VAT payment is more than 15 days overdue, businesses will pay a first late payment penalty.
  • If a VAT payment is more than 30 days overdue, the first late payment penalty increases and a second late payment penalty will also apply.
  • The first late payment penalty is calculated as 2% of the VAT owed at Day 15 (if the VAT payment is made between 16 and 30 days overdue) plus 2% of what is still outstanding at Day 30 (if the VAT payment is made 31 days or more overdue).
  • The second late payment penalty is then calculated at a daily rate of 4% per year on the outstanding balance and charged daily from day 31 until the outstanding balance is paid in full.
  • To help customers get used to the changes, HMRC will not charge a first late payment penalty on VAT payments due on or before 31 December 2023 ONLY if the business either pays in full, or a payment plan is agreed within 30 days of the payment due date.

Interest Charges for Late Payment

  • Late Payment Interest:  Is charged from the day after the VAT payment is due until the day it is paid in full at a rate of 2.5% plus the Bank of England base rate.
  • Repayment interest: If you are due a rebate, HMRC will pay you interest if they are overdue in repaying VAT.  The rate will be calculated at the Bank of England rate minus 1% with a minimum rate of 0.5%

Payment Plans

HMRC will help businesses that cannot pay their VAT bill in full and customers may be able to set up a payment plan to pay their bill in instalments.

  • After 31 December 2023, if a customer proposes a payment plan within 15 days of the payment being due and HMRC agrees it, they would not be charged a late payment penalty, provided they keep to the conditions of the payment plan.
  • Late payment penalties can apply where proposals are made after the first 15 days, but the agreement of the payment plan can prevent them increasing.

Further details on the changes can be found on https://www.gov.uk/government/collections/vat-penalties-and-interest.