From 1st January 2023 the way VAT penalties are charged is changing. This is known as VAT Penalty Reform. At present, you are charged something called the ‘default surcharge’. This will be split into two separate charges so you'll pay one penalty for submitting your VAT returns late and a further penalty for paying any VAT owed late.

Late Submission Penalty

Late Submission Penalty is a points based system. Every time you file your VAT return late, you gain a point. Sadly points do not equal prizes, instead they add up to a threshold. The threshold amount depends on how often you are scheduled to submit your VAT return, so they are different for annual, quarterly or monthly submissions (see the table below):

Submission frequency      Penalty points threshold      Period of compliance*
Annually 2 24 months
Quarterly 4 12 months
Monthly 5 6 months

* The length of time needed to meet Condition A (filing on time) if you want to reset your points.

The example I'm showing here relates to quarterly returns, which is the most common in the UK. Each time you file a VAT return late, you are issued with one point until you hit your threshold. At this point, you are fined £200.

From then onwards, if you file late again, you're issued with a further £200 fine each time. You won't get any more points because you're at the threshold, but you will still be issued with fines.

Reducing Points

To stop the fines, you need to reduce your points, and in order to do that, you have two conditions to meet:

Again working on the quarterly filing example; if you are at the threshold, you will have to

  1. file your quarterly returns on time for an entire year (Condition A) and
  2. make sure that you're up to date for the last two years i.e. all returns have been filed. (Condition B)

In practice, the last eight quarterly returns must have all been filed and the last four of them must have been filed on time. If you meet both of these criteria, your points are reset to zero.

If you submit returns annually or monthly, the ‘Period of compliance’ column in the table above shows the length of time you need to submit on time for.

If you are not at the points threshold (i.e. you have 3 or less points) those individual points expire after two years.

Late Payment Penalties

In addition, there are late payment penalties. These are charges based on the amount of VAT owed and not paid. The amount of the charge depends on how may days your payment is overdue.

Between 1 to 15 days overdue, there's no penalty at all. (For the first year, up to 1st Janury 2024, there will be no penalty between 1 to 31 days).

If VAT owed is 16 to 30 days overdue, the penalty will be 2% of the amount owed at day 15.
In our example here, £2000 is owing and unpaid at day 16 = £40 penalty.

At 31 days overdue there's a further penalty - 2% of the amount that was owed at day 30.
In our example, VAT is still unpaid at day 31, so that's another £40 penalty.

From day 31 onwards, you are charged a daily rate of 4% per annum on the amount of VAT still owing. This is to encourage you to pay it faster. On top of that, you will be charged interest on what's owed.
In our example, say the VAT was paid at 51 days overdue, the total late payment penalty will look like this

  • 2% of what it owed at day 15 - £40
  • + 2% of what it owed at day 30 - £40
  • + a daily 4% fine from day 31 onwards - just over £4
  • + interest - just under £4
  • = giving a penalty total just over £88.

What can I do to get ready for this?

First of all, make sure your VAT returns are up to date and that you know the due dates of your returns and payments. If you don't know this, log into your government gateway business tax account to find the information.

You can set up a direct debit to pay the VAT you owe. This means you'll never incur those late payment penalties, as long as the money is available in your account.

If any of this is a struggle to you engage yourself a VAT Agent – a bookkeeper or accountant who can deal with VAT and HMRC on your behalf.

If you need help with your VAT returns, please get in touch with somebody like myself.

For Reference:
Guidance: VAT penalties and VAT interest charges
Policy paper: Penalties for late submission

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