VAT has always been the lenient of the taxes, but it looks like it’s all set to change! HMRC are introducing a new penalty and interest regime for VAT from 1st January 2023 to replace the existing VAT default surcharge regime.

Who is affected?

The changes will affect everyone submitting VAT Returns for accounting periods starting on or after 1 January 2023.

Late submission penalties

Late submission penalties will work on a points-based system.

For each VAT Return you submit late you will receive one late submission penalty point.

Once a penalty threshold is reached, you will receive a £200 penalty and a further £200 penalty for each subsequent late submission.

The late submission penalty points threshold will vary according to your submission frequency, see table below:

The points thresholds are:

Submission frequencyPenalty points thresholdPeriod of compliance
Annually224 months
Quarterly412 months
Monthly56 months

You will be able to reset your points back to zero if you:

  • Submit your returns on or before the due date for your period of compliance — this will be based on your submission frequency
  • Make sure all outstanding returns due for the previous 24 months have been received by HMRC

Late payment penalties

Under the new regime, there are two separate late-payment penalties – referred to as the first penalty and second penalty.

First penalty

  • If the tax is unpaid after day 15 the penalty is 2% of the tax outstanding
  • If the tax is unpaid after day 30 the penalty is 4% of the tax outstanding

Second penalty

  • If the tax is unpaid after 31 days an additional penalty accrues on a daily basis at a rate of 4% per year until the tax is paid

A Time to Pay arrangement will stop penalties accruing once it has been agreed with HMRC.

The biggest change under the new regime however is that, provided all outstanding VAT is paid within 15 days of the due date (or a Time to Pay arrangement is requested within that same period), no late-payment penalty will arise. There will however still be late-payment interest (see below).

Days after payment due dateAction by taxpayerPenalty
 0-15Payments made, or Time to Pay is arranged by day 15No penalty
16-30Payments made, Time to Pay is arranged by day 302%
Day 30Some tax is still unpaid, no Time to Pay agreed4%

From day 31 an additional penalty accrues on a daily basis at a rate of 4% per year until the tax is paid

Time to Pay arrangements

Time to Pay arrangements are effectively treated in the same way as payment when it comes to stopping the penalty clock. Provided the Time to Pay application is ultimately successful, the date on which it is first requested is treated as the date of payment.

For example, if Time to Pay is requested from HMRC on day 14, no penalty will arise regardless of how long it takes for HMRC to approve the Time to Pay arrangement.

However, if the terms of that Time to Pay agreement are subsequently broken by the taxpayer, the first and second late-payment penalties will be charged as if the Time to Pay had never had effect. This means that missing a single scheduled payment under the Time to Pay could cause full penalties to be charged, even if all previous instalment payments under the agreement have been made on time.

Late Payment interest

From 1st January 2023, late payment interest will be charged from the day a VAT payment becomes overdue until the date it is paid in full. The rate applied will be the Bank of England base rate plus 2.5%.

In the first year of the new late payment penalties there will be a “period of familiarisation”. Under this, HMRC will not charge the first leg of the first penalty (the 2% at day 15) from 1 January 2023 until 31 December 2023.

This means that, provided payment is made within 30 days of the due date, no late payment penalty will arise in the first year the rules are in effect. Ordinary late payment interest will however be charged as usual.

Overall, the new penalty regime appears to still remain pretty fair but we await to see this in practice. The key points to takeaway are:
  • Ensure you submit your VAT return by the due date, even if you cannot afford to pay
  • Where you cannot afford to pay, set up a Time to Pay arrangement before day 15 to stop penalties
  • Late submission penalties will reset upon good compliance
If you have any concerns about your VAT return or any of these changes, please get in touch with your Client Manager or email and we’ll put you in touch with one of our specialists.