Alas, there are yet more changes to get your head around. HMRC have now decided to change VAT late submission penalties, late payment penalties, and VAT interest charges. As if we didn’t have enough to worry about in this period of flux and seemingly endless government policy changes, about turns, and then the inevitable resignations. This blog should make the changes a bit easier for you to get up to speed on. Unless HMRC make a U-turn of course!


Will the new VAT penalties affect me?

The changes will affect everyone submitting a VAT return after 1 January 2023. Late submission penalties will be applied for anyone missing the deadline. Even nil or repayment VAT returns received late will be subject to late submission penalty points and possible financial penalties. So, if you are ever late filing your VAT return then be warned!


What will happen if I submit my VAT return late?

There will be a new points-based system for calculating the penalty due on the late submission of VAT returns. 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 threshold depends on your submission frequency –

  • For monthly VAT return submissions, the threshold is 5 points and the period of compliance (during which you must submit all subsequent VAT returns on time) is 6 months;
  • For quarterly VAT return submissions (which is the most usual), the threshold is 4 points and the period of compliance is 12 months;
  • For annual VAT return submissions, the threshold is 2 points and the period of compliance is 24 months.


If you miss a deadline and start building up points, you can reset your points back to zero if you –

  • Submit subsequent returns early or on the due date for your period of compliance;
  • Make sure all outstanding VAT returns due for the previous 24 months have been received by HMRC.


This sounds fair, but it will involve a lot of work for those who have got themselves into a bit of a VAT pickle over the past couple of years. The VAT man is definitely getting less fluffy, which is saying quite something! Especially since Making Tax Digital for VAT came into effect for all VAT registered businesses, even if their turnover was under the VAT registration threshold, from April 2022. If you aren’t up to speed with MTD for VAT then you can read more about this here.


What will happen if I don’t pay my VAT bill on time?

It all depends on how late you pay with the penalty rate getting bigger over time!

  • Up to 15 days overdue. You will not be charged a late payment penalty if you pay the VAT that you owe or agree a payment plan on or between days 1 and 15;
  • Between 16 and 30 days overdue. You will receive a first penalty calculated at 2% on the VAT that you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30;
  • 31 days or more overdue. You will receive a first penalty calculated at 2% on the VAT that you owe at day 15 plus a further 2% on the VAT that you owe at day 30. You will receive a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance, which will be calculated when the outstanding balance is paid in full or a payment plan is agreed.


You’ve got a bit of time to get used to all of this. The VAT man will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023. IF you pay in full within 30 days of your payment due date. This may just save those of us who take a while to let new processes sink in!


Late payment interest will still be charged….

From 1 January 2023, HMRC will charge late payment interest from the day the payment is overdue to the day the payment is made in full. It will be calculated at the Bank of England base rate plus 2.5%.


…. and so will interest on VAT amounts owed by HMRC

HMRC will pay you repayment interest on any VAT that you are owed for accounting periods starting on or after 1 January 2023.

Repayment interest will be calculated at the Bank of England base rate minus 1%, with a minimum rate of 0.5%. It will be calculated from the day after the due date or the date of submission (whichever is later) and until the day HMRC pays the repayment VAT amount due to you in full.

This is a fairer system which will be welcomed by most taxpayers. However, there will still be winners and losers when the new system comes into play. The new regime will be good news for businesses who may occasionally submit a VAT return late or make a payment less than 15 days late due to human error or because of a cash-flow related delay. They will now incur only small amounts of penalties and interest.

But it will be bad news for those businesses that are struggling with the cost of living crisis and cannot find the money to pay their VAT bills, and who end up paying more than 30 days past the due date. The penalties that they will incur may be enough to be the final nail in the coffin for their businesses.


Make your life a bit easier

Even if you can’t pay your VAT on time, if you file your VAT return on time that will help to keep penalties to a minimum. Your best bet is to file the VAT return on time and attempt to set up a payment plan with HMRC. Don’t just stick your head in the sand, it will only make things worse.