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Changes to VAT penalties from 1 January 2023

Updated: Aug 10, 2023

What is changing?

For VAT return periods starting on or after 1 January 2023, the new penalty regime will work on a points-based system and it will work as a two-part system, the first affecting late filing offenders and the second late payment of the VAT return liability.

So for late VAT return submissions you will pay a fixed penalty plus interest on the late payment as follows:

1) Late submission penalty

This works on a points-based system meaning that even if there is nothing to declare, a penalty point will be given on each occasion that a business fails to submit its VAT return on time, and once the penalty points threshold has been met penalties will begin to be assigned.

This will start with a £200 penalty and will be followed by a further £200 penalty for each subsequent late submission.

For standard quarterly submissions, the penalty point threshold is 4 points with a compliance period of 12 months.

Points and the compliance period differ for annual and monthly VAT submissions.

All points will be cleared from the system once they are two years old and it is also possible to reset your penalty points back to zero.

2) Interest on VAT overdue

This revised method is designed to operate more fairly than its predecessor by encouraging taxpayers to pay the VAT liability sooner by having lower penalty rates when making earlier repayments. The interest penalty is calculated as follows:

Up to 15 days

There will be no penalty if the VAT is paid in full by day 15 after the due date or a payment plan is agreed on or between days 1 to 15.

Between 16-30 days

A first penalty will be calculated at 2% on the VAT owing at day 16 until day 30 (after the due date for payment).

31 days or more

Additionally, if there is still VAT owing after 30 days past the due date, a second penalty will then become payable and is calculated at a daily rate of 4% per year for the duration that the outstanding balance remains.

Period of familiarisation

In order to enable businesses to get used to the new changes, HMRC will not charge a first late payment penalty for the initial year (1 January 2023 – 31 December 2023), providing that the VAT is paid in full within 30 days of the payment due date.

Steve Pearce MICB

16th December 2022

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