New VAT penalty system

HMRC have introduced a new VAT penalty system and as mentioned previously, this is being implemented in line with the introduction of Making Tax Digital.  

New VAT penalty system

The new VAT penalty system was introduced by HMRC on 1 January 2023 and essentially targets two areas of VAT non-compliance:

  • Penalties for late submission.
  • Late payment penalties

Penalties for late submission

Put simply, when you miss a VAT return submission deadline you will incur a point. HMRC are also going to introduce a separate points based system for income tax in April 2026 as we've mentioned in an earlier post.

Once you reach a points threshold (which is based on frequency of submissions) you will be subject to a £200 penalty. The relevant thresholds are set out below:

  • For annual returns it is 2 points.
  • Returns submitted on a quarterly basis will have a threshold of 4 points. 
  • Those returns which are submitted monthly have a threshold of 5 points.

Any points that have accrued, expire after 2 years when you remain below the points threshold. Once you have reached the threshold, any points tally will be reset to zero provided two conditions are met.

The first is that you have met your return obligations for a set period based on their submission frequency (monthly, quarterly etc).  This is known as the period of compliance -  see below. 

The period of compliance is based on frequency of returns.  For annual returns it is 2 years, for quarterly returns it is 1 year and for monthly returns it is 6 months.

The period of compliance starts on the first day of the month, following the date falling one day after the missed deadline.

So for example Phil has a missed submission deadline of 7th July so his period of compliance starts on 1st August.

Luke on the other hand has a missed submission deadline of 31st March  so his period of compliance starts on 1st May (1 day after the submission deadline is 1st April).

The other condition you'll need to fulfil so as to reset your points tally to zero, is to ensure you have submitted all outstanding tax returns for the last 2 years.

If you continually miss your submission deadlines after the points threshold has been reached (plus a penalty has been charged), you'll be liable to an additional £200 fixed penalty for each missed obligation. Under the new regime, penalties apply to late filed returns even when there is no liability or a repayment is due.

It may be possible to avoid penalties and points for late filing, where you have a reasonable excuse for doing so.

These penalty rules for late submission do not apply to the first VAT return of a newly registered person, or the final VAT return once a business cancels their registration. Additionally, they do not apply to a one-off return that covers a period other than one month, one quarter or one year.

Penalties for late payment

These penalties can be charged as a result of a VAT return being submitted, an amendment or correction to a previously filed VAT return, or a VAT assessment being raised by HMRC.

However, penalties are not charged on late payments on account, or instalments for the VAT annual accounting scheme.

Essentially, the sooner a late payment is made, the lower the penalty will be. Although no penalty will be payable if the VAT liability is settled within 15 days of the due date. 

Additionally, HMRC have indicated that for the first year (to 31 December 2023) of the new system being implemented, there will be no penalties raised for late payment. This is on the proviso that any VAT liability is settled within 30 days of the due date.

A first late payment penalty will be payable 30 days after the payment due date based on a percentage of the balance outstanding.

Those payments made between 16 and 30 days late attract a penalty of 2%. This is based on the amount of VAT due on day 15.

It VAT is still unpaid 30 days after the due date, an additional 2% will be charged on any VAT liability owed at day 30. 

From day 31, a second late payment penalty will be charged at 4% per annum. This will accrue on a daily basis and will be based on amounts outstanding.

It may be possible to stop penalties accruing where a Time To Pay agreement has been reached with HMRC. Unfortunately, this does not prevent late payment interest being charged on any outstanding VAT liability, regardless of whether an agreement has been reached.

Once again, it may be possible to appeal against any penalties raised by HMRC on the grounds of reasonable excuse.

This harsh new penalty system is therefore yet another reason to ensure you are fully conversant with Making Tax Digital when it is finally implemented by HMRC.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

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