New VAT penalty regime from 2023

A new VAT penalty regime will affect all VAT registered businesses from 1 January 2023. The changes will apply to the late submission and / or late payments of VAT returns for VAT return periods beginning on or after 1 January 2023. 

Under the new regime, there will be separate penalties for late VAT returns and late payment of VAT as well as a new methodology to the way interest is charged. This will replace the default surcharge regime and for most taxpayers should represent a fairer system.

The new system will be points-based. This means that taxpayers will incur a penalty point for each missed submission deadline. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The threshold varies depending on the required submission frequency (monthly, quarterly, annual). For quarterly VAT returns, the penalty points threshold will be 4 points. The penalty points will reset to zero following a period of compliance, for quarterly returns this requires 12 months of compliance. There are also time limits after which a point cannot be levied. 

In addition, the new system will see the introduction of two new late payment penalties. A first payment penalty of 2% of the unpaid tax that remains outstanding 16-30 days after the due date. The second payment penalty increases to 4% of any unpaid tax that is 31 or more days overdue.

To help with the introduction of the new system, HMRC has confirmed that it will not be charging a first late payment penalty for the first year of the new regime (1 January - 31 December 2023) once the debt is paid in full within 30 days of your payment due date.

Late payment interest will be charged from the date a payment is overdue, until the date it is paid in full. Late payment interest is calculated as the Bank of England base rate plus 2.5%.