From 1 January 2023, HMRC implemented a new VAT penalty regime that aims to simplify the rules and encourage timely filing and payment.
The new points-based system aims to simplify the rules and promote compliance among VAT-registered businesses by replacing the default surcharge system and enforcing fixed fines for late submissions, in addition to extra charges for delayed payments.
By enforcing penalties that increase in severity for repeat offenders, the new regime ensures that late filers are penalised more extensively than those who only miss the occasional deadline. This approach is considered fairer for businesses and helps to ensure that they are not penalised unfairly. Ultimately, the new VAT penalty regime encourages businesses to meet their VAT obligations in a timely and efficient manner, contributing to a stronger tax system and a more level playing field for all businesses.
As VAT obligations can be time-consuming and stressful, it's crucial to grasp how these new rules will impact your filing process. Understanding the system and complying with its regulations can make a world of difference in avoiding penalties.
Here's what you need to know about the latest changes to the VAT penalty system:
- What is the new VAT penalty system?
- Which businesses will be impacted by the new VAT penalty system?
- What are the penalties for late VAT submissions?
- The VAT penalty thresholds
- What are the penalties for late VAT payments?
What is the new VAT penalty system?
The new VAT penalty regime operates on a tiered points-based system that imposes penalties as a percentage of the VAT owed, with the severity of the penalty increasing for each default during a 12-month period.
"HMRC is committed to becoming one of the most digitally advanced tax authorities in the world. The ambition and pace of change need to be balanced with well-tested systems and good customer service, particularly when businesses are facing additional challenges and uncertainty…”
The Financial Secretary to the Treasury, Lucy Frazer
Which businesses will be impacted by the new penalty system?
The new penalty system applies to all VAT-registered businesses who fail to comply with their VAT obligations, including those who fail to submit on time, pay the incorrect amount of tax and keep inaccurate or insufficient records.
What are the penalties for late VAT submissions?
To determine the penalty for late submissions, taxpayers will now be subject to a points-based assessment known as the VAT penalty threshold.
The penalty threshold varies depending on how frequently a business is required to submit their VAT returns. When a business receives a point or penalty for a late submission HMRC will send a notification. Once the business reaches its specified penalty threshold, they will receive an initial penalty of £200, followed by a further £200 fine for each subsequent late submission.
Annually filed VAT returns will accrue two points, quarterly filed VAT returns will accrue four points, and monthly filed VAT returns will accrue five points.
The VAT penalty thresholds
| Submission Frequency | Penalty Threshold |
| Annually | 2 points |
| Quarterly | 4 points |
| Monthly | 5 points |
Repeat offenders will be subject to more severe penalties, with the points-based system ensuring that those who consistently fail to meet their VAT obligations are held accountable for their actions.
Businesses may accrue points but not necessarily reach their penalty threshold. If this is the case, these points will expire after two years. If you have reached the penalty threshold these points will remain in place until there has been a consistent period of compliance and the submission of outstanding VAT returns is completed.
A consistent period of compliance
This refers to meeting all submission commitments on time for the period of compliance.
| Submission timeline | Period of compliance |
| Annually | 24 months |
| Quarterly | 12 months |
| Monthly | 6 months |
Submission of outstanding returns
All outstanding VAT returns which were due within the preceding 24 months, regardless if they were late or not, must be submitted.
What are the penalties for late VAT payments?
In addition to fines for late VAT submissions, taxpayers who fail to settle their VAT bill on time will be charged a late payment penalty. The initial penalty is calculated at 2% on the VAT owed at day 15 if no payment plan is agreed within 16-30 days, and the fine increases from there.
Moreover, a second daily rate penalty will be charged at a rate of 4% per annum on the outstanding balance if a payment is made over 30 days late. HMRC also charges interest on late payments at the Bank of England base rate plus 2.5%.
| Days after payment due date | Action by taxpayer | Penalty |
| 0-15 days | VAT payment made in full or a payment plan is agreed | No penalty payable |
| 16-30 days | VAT payment made in full or a payment plan is agreed within this timeframe | First penalty calculated at 2% on the VAT owed at day 15 |
| Day 31 | No payment made, no payment plan arranged | Penalty calculated at 2% of what was due at day 15, plus 2% of what was due at day 30 |
Source: HMRC Guidance: Prepare for upcoming changes to VAT penalties and VAT interest charges
What steps can you take to steer clear of VAT penalties?
The best course of action to avoid VAT penalties is file on time and meet the payment deadline. If you're struggling to keep up with your filings, outsourcing to a team of professionals can help ease the burden. In the event that you receive a late penalty notice, it's important to act swiftly - you'll have 30 days from the notice date to pay or appeal.
With the implementation of a new VAT penalty system, it's essential for businesses to take the time to understand the policies and procedures. Although the new system aims to simplify the rules, it's important to note that any new government initiative can take time to fully comprehend.
By reviewing and assessing current processes, businesses can identify areas that may need improvement or updating. This can include reviewing record-keeping practices, payment schedules, and filing procedures. Businesses should also ensure that their staff are aware of the new system and are trained to comply with the updated regulations.
For those who have multiple submission obligations or need to change the frequency of their reporting, we recommend that you speak with your accountant as these instances may require additional support.
How can DSA Prospect help?
At DSA Prospect, we understand that VAT can be a burden, especially with the introduction of a new penalty system. Our team can help simplify your VAT process and provide services including the preparation and submission of returns, ensuring that you remain compliant with your VAT obligations.
Get in touch with us to book a time to discuss your options and how we can help you navigate the new VAT penalty system.
This blog was updated on: 19/04/2023
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