04 October 2022

Originally planned to be introduced from April 2022, the new VAT penalty scheme is finally due to make its appearance on 1 January 2023.

The current penalty scheme, known as the default surcharge, will be replaced by 2 different penalty schemes – one focusing on late payment of VAT and the other focusing on late submission of VAT returns. 

Alongside this HM Revenue & Customs are also making changes to their interest policy, bringing it inline with other taxes – interest harmonisation.

Who will these changes affect?  

Everyone that submits a VAT return starting on or after 1 January 2023.

Under the old default surcharge scheme, a late repayment return wouldn’t incur any penalties. This is set to change and under the new scheme and late repayment VAT returns COULD incur financial penalties.

What happens if I’m late paying my VAT return?

Basically, you’ll be charged a penalty based on a percentage of the outstanding VAT and you’ll also be charged interest.

The sooner you pay the late VAT the lower the penalty rate will be, the longer you leave it, the greater the penalty.

  • Up to 15 days overdue – you will not be charged a penalty if you pay the VAT in full or arrange a payment plan between day 1 and 15
  • Pay between 16 and 30 days overdue – you will receive a 2% penalty based on the amount outstanding on day 15.
  • Pay after 31 days or more overdue – you will receive a first penalty of 2% based on the amount outstanding on day 15, plus a further 2% of the amount you owe on day 30. You will then receive a second penalty which is calculated at a daily rate of 4% per year for the duration of the outstanding balance.  The second penalty will be calculated and issued when the outstanding balance is paid in full, or a payment plan agreed.

Can I expect a period of familiarisation?

For this, yes.  HM Revenue & Customs have agreed to give businesses some time to get accustomed to the new penalty scheme.  HM Revenue & Customs will not be charging late payment penalties in the first year (from 1 January 2023 to 31 December 2023) as long as you pay the VAT you owe within 30 days of the due date.

Will I be charged interest on my late payment?

From 1 January 2023, HM Revenue & Customs will also charge late payment interest from the day your payment becomes overdue to the day your payment is made in full.

What will happen if I file my VAT return late?

You will receive penalty points for any VAT returns starting on or after 1 January 2023 which are filed late, – like you do with driving.  The more points you accumulate, the higher the penalty imposed.

HM Revenue & Customs will issue you 1 penalty point each time you submit a late VAT return, and on reaching a penalty threshold within a specified period of compliance (see below), a £200 penalty will be issued.  Each VAT return filed late after this within the period of compliance will incur a further £200 penalty.

So, what is the penalty threshold?

  • Those filing annual VAT returns will receive a £200 penalty if 2 VAT returns are submitted late
  • Business filing quarterly VAT returns will receive a £200 penalty if 4 VAT returns are submitted late
  • For those filing monthly VAT returns, if 5 VAT returns are filed late then the £200 penalty will be issued.

Can I reset my points to Zero and if so, how?

Absolutely, you just need to submit your VAT returns on time for your period of compliance. The period of compliance is:

  • 24 months for those filing annual VAT returns
  • 12 months for those filing quarterly VAT returns
  • 6 months for those filing monthly returns

You must also make sure that any outstanding late VAT returns are filed and up to date.

What is Interest Harmonisation and how will it affect me?

As we mentioned earlier, HMRC charge interest on amounts owed to them. Interest is charged from the day after the due date of the late payment to the date that the payment is received and is calculated at 2.5% above the Bank of England base rate.

If on the other hand, you have overpaid VAT and HM Revenue & Customs are due to make a repayment to you, again interest will be payable.  Repayment interest is calculated as the Bank of England base rate minus 1%, with the minimum rate of repayment interest set at 0.5% and is payable from the last day the payment was due or was made, to the date the repayment was made.