HMRC sets new VAT penalties for the New Year

December 15, 2022

HMRC is updating its penalties for businesses that submit VAT returns late or don’t pay their VAT bills on time. 

They’re also changing the way they charge interest on late VAT payments. 

The changes take effect from January 2023 and they do away with the default surcharge system. 

The new rules are seen as an improvement by many, but the changes have the potential to catch some businesses off guard, especially with the recent shift to Making Tax Digital for VAT

The new penalty for late VAT filing

HMRC’s new penalty for late VAT filers is based on a points system. 

In short, businesses get a ‘point’ each time they file a VAT return late. When their number of points exceeds a certain level, they get a fixed £200 fine. 

The points threshold varies according to how often a business submits returns. 

Monthly VAT filers have a five-point threshold; quarterly filers get four points and annual filers get two points. 

Once a business reaches this threshold, they’ll get a new £200 fine each time they submit late, but the points do expire eventually. 

Unlike with the default surcharge, there’s no link between the amount of VAT due and the penalty. This means that businesses filing £0 returns could still get a penalty. 

The new penalty for late VAT payments

HMRC’s new penalty for late payments is intended to get struggling businesses to engage with the agency as soon as possible. 

The penalties are split into two categories depending on the lateness of the payment:  

  • The first penalty will be a 2% charge on the unpaid VAT at day 15. This will be followed by an additional 2% charge on the same amount at day 30. 
  • The second penalty will start on day 31 and will be charged daily based on an annual rate of 4% of the outstanding amount.

Businesses can stop the penalty clock by agreeing a Time to Pay (TTP) arrangement with HMRC. But if the terms of the TTP are broken then the full penalties will be applied. 

HMRC has said there will be a ‘period of familiarisation’ where the tax authority won’t charge 15-day fines for 12 months, but businesses will need to get up to speed quickly.

Interest payments

As well as the penalty changes, HMRC is also changing the way interest is applied to late VAT payments from January. 

Late payment interest for VAT will be aligned with other taxes and charged at the Bank of England base rate plus 2.5%

But don’t expect HMRC to repay this level of interest if it owes you money. HMRC repayment interest will be payable at the Bank of England base rate minus 1%. 

What is Making Tax Digital for VAT?

The Government’s Making Tax Digital for VAT initiative is designed to make it easier for businesses and self-employed people to file VAT returns and pay VAT. 

It requires VAT-registered businesses to keep digital records of the VAT and to submit returns digitally using cloud-based software like Xero and FreeAgent. 

It became compulsory for businesses to submit electronic returns in April 2022. 

If you would like to learn more about Making Tax Digital and how it can help your business, you can reach a member of our team here or call: 0808 281 0303.