Prepare for the new VAT penalty rules
HMRC’s new penalty system for late VAT returns and payments will take effect from January 2023. What do you need to know about the new rules?
Who is affected
The changes will affect everyone submitting VAT Returns for accounting periods starting on or after 1 January 2023.
Any nil or repayment VAT returns received late will also be subject to late submission penalty points and financial penalties.
Out with the old. Under the current system HMRC can charge a financial penalty (surcharge) if you’re late with your VAT return or payment. For a first and perhaps a second offence HMRC will usually not fine you but give you a suspended sentence. If you’re late again within a period of time you’ll be fined. From January 2023 the new system separates the penalties for late payments and late returns.
The New VAT Rules
Under the new regime HMRC will charge interest on any part of your VAT bill which is unpaid starting from the day after it was due. If you pay by direct debit interest starts one month and eight days from the end of the VAT return period. It accrues for each whole day that any VAT is overdue. It’s charged at the Bank of England base rate plus 2.5% per annum on the amount you owe.
Charges if you do not pay your VAT on time
For late payment penalties, the sooner you pay the lower the penalty rate will be.
|Days after payment due date||Late Payment penalty|
|0-15||You will not be charged a penalty if you pay the VAT you owe in full or agree a payment plan on or between days 1 and 15.|
|16-30||You will receive a first penalty calculated at 2% on the VAT you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.|
|Day 31+||You will receive a first penalty calculated at 2% on the VAT you owe at day 15 plus 2% on the VAT 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. This is calculated when the outstanding balance is paid in full or a payment plan is agreed.
From January 2023 HMRC will issue a penalty point each time you’re late with a return but you won’t be fined until your points reach the penalty threshold. The threshold varies according to how often you’re required to submit returns: for monthly returns it’s five points, for quarterly it’s four and for annual it’s two. After spending two years on your record a penalty point is removed. So, if you keep a clean slate for two years you’ll have zero points against you. The deadline for submitting your returns isn’t changing. Like that for payments it’s one month and seven days after the end of each VAT return period.
How much? Unlike the current surcharge system the penalties won’t increase the more returns you submit late. Instead once you reach the threshold you’ll be charged £200 for each late return whether or not you owe any VAT.
Tip. Unlike the current system where you can be surcharged if you’re late with either your VAT return or your payment, penalties only apply to returns. That means even if you can’t pay your VAT bill you should get your return in on time. That way you’ll only face interest charges until you settle what you owe.
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