HMRC VAT Penalty Regime changes

For accounting periods starting on or after 1st January 2023, HMRC has introduced a new penalty regime for late VAT submissions and payments.

The new measures include separate penalties for late submission of VAT returns and late payment of VAT.   There are also changes in the calculation of interest for late payments to HMRC. 

What are the changes?

Late filing penalties

From 1st January 2023, penalties for late VAT submission will operate on a points based system. 

Each return submitted late, even if it is a nil return or a refund is due, will incur a penalty point.  The points will accumulate until you reach the points threshold:

Accounting periodPoints threshold
Annually2
Quarterly4
Monthly5

Once you reach the points threshold you will receive a £200 penalty.  A further £200 penalty will be issued for each late submission after reaching the threshold.

If you remain below the points threshold, points will automatically expire after 24 months.  If you have reached the points threshold the points will expire after you have met your obligations for a set period of time based on their submission frequency, known as the period of compliance.

Late submission penalties do not apply to :

  • Your 1st VAT return is you are newly registered for VAT
  • Your final VAT return after cancelling your VAT registration
  • One off returns the cover a period other than monthly, quarterly or annual.

Late payment penalties

The penalty you will be charged depends on how long the payment has been overdue, with larger penalties due for later payments.

You’ll receive a first late payment penalty if your payment is 16 or more days overdue.

When your payment is 31 or more days ov0erdue, your first late payment penalty increases, and you get a second late payment penalty.

First late payment penaltySecond late payment penalty
Payment up to 15 days overdueNoneNone
Payment between 16 and 30 days overdueCalculated at 2% on the VAT you owe at day 15.None
Payment 31 days or more overdueCalculated at:

• 2% of what was outstanding at day 15

• plus 2% of what is still outstanding at day 30
Calculated at:

•a daily rate of 4% per year on the outstanding balance

•charged everyday from day 31 until the outstanding balance is paid in full

There will be a “period of familiarisation” to allow business to adjust to the new system.  This means HMRC will not charge a first late payment penalty until 2024, providing payments are paid in full within 30 days.  Late payments overdue by 31 days or more will be subject to the full 4% charge in addition to the daily second late penalty.

Interest on late payments

From 1st January 2023 late payment interest will be charged from the first day a VAT payment is overdue.  Interest is calculated according to the Bank of England rate plus 2.5%.

Repayment interest

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 later of the day after the due date or the date of submission, 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 never be less than 0.5%.

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