New VAT Penalty & Interest Rules

HMRC are rolling out a new penalty and interest regime relating to the late filing of VAT Returns and the late payment of VAT. The new regime will affect all VAT registered businesses for their Return periods starting on or after 1 January 2023. 
 
The changes are to encourage businesses to make payments as soon as possible and aim to make the penalties fairer, ensuring only those who persistently fail to file their VAT returns on time or make late payments are penalised.

Late Payment Penalties
Ordinarily, a businesses’ VAT liability is due to be paid to HMRC 1 month and 7 days following the end of the VAT Return period. For example, a period ending 31 March 2023 means the business must pay its VAT by 7 May 2023. The new late payment penalty system is as follows:

• Where the VAT payment is between 1 and 15 days overdue, or a payment plan is agreed between HMRC and the business no penalty will be charged.
• Where the VAT payment is between 16 and 30 days overdue – HMRC will issue a 2% penalty calculated on the VAT that is outstanding at the end of day 15.
• Where the VAT payment is 31 days or more overdue – HMRC will issue an additional 2% penalty calculated on the VAT that is outstanding at the end of day 30.
• Further penalties are then issued at a daily rate of 4% per annum on the outstanding balance up until the balance is paid in full or a payment plan is agreed.

Interest will be charged in all cases from the original due date.
 
HMRC will allow a period of familiarisation for businesses to get used to the changes and therefore will not charge the first late payment penalty for the first year (from 1 January 2023 to 31 December 2023) if payment is made in full within 31 days of the payment due date. Any partial underpayment of VAT will still incur the penalties.

Late Filing Penalties
The new late filing penalty regime will work on a points-based system. Each late submitted VAT Return will incur one penalty point. Once a penalty point threshold has been reached, the business will receive a £200 penalty, with further £200 penalties being issued for each subsequent late submission.
 
The penalty threshold will differ according to the business’ submission frequency, and these are highlighted below:

Submission Frequency	Penalty Points Threshold	Period Of Compliance
Annually	2	24 Months
Quarterly	4	12 Months
Monthly	5	6 Months

The penalty points are reset back to zero if the business:

• Submits all VAT Returns on or before the due date for the period of compliance and (as indicated above) and;
• Makes sure all outstanding VAT Returns due for the previous 24 months have been submitted to HMRC.

An example: Where a business submitting quarterly VAT Returns has its first period ending on the 31 March 2023 following the changes, submits each VAT Return late up until the VAT Return period ending 31 December 2023, 4 penalty points would have been issued by 7 February 2024 meaning the penalty points threshold will have been reached. HMRC will therefore issue a £200 penalty.

VAT Return	Due Date	Late	Point	Total Points	Penalty
31 Mar 2023	07 May 2023	Yes	1	1	£ -
30 Jun 2023	07 Aug 2023	Yes	1	2	£ -
30 Sep 2023	07 Nov 2023	Yes	1	3	£ -
31 Dec 2023	07 Feb 2024	Yes	1	4	£ 200

In order for the business have its points total reset back to zero, it must:

• Submit the 4 VAT Returns up until 31 December 2024 on time and;
• Ensure all VAT returns in the previous 24 months ending with 31 December 2024 have been submitted to HMRC.

Late Payment Interest
HMRC will charge late payment interest on VAT from day one after the due date at a rate of 2.5% plus the Bank of England based rate. The interest payments will be charged in addition to any late filing or late payment penalties issued by HMRC.
 
Practical tips to avoid penalties and interest late submission and late payment
Direct Debits – These can be set up by the business where HMRC automatically collect the payment of VAT for the due date.

Payment Plans – If your business is struggling to make VAT payments on time, it is strongly advised that HMRC’s Business Payment Support service is contacted as soon as possible to arrange a payment plan. This will help to avoid any late payment penalties being issued. However, even if a payment plan is agreed between the business and HMRC, late payment interest will still be charged.
 
Submitting Returns on time – Even if the business struggles to pay its VAT liabilities, it is recommended that the VAT Returns are submitted on time to avoid the late filing points racking up and penalties being issued. If your business is struggling to submit VAT Returns on time, it is worthwhile reviewing the bookkeeping process and considering whether a cloud-based accounting system can ease the workload.

We are here to help, so if you have any queries or wish to discuss any of the above then please contact us.