Changes to VAT penalties and VAT interest charges from Jan 2023

Some new VAT late filing and payment penalties and new VAT interest charges are being introduced very soon.

The changes will affect everyone submitting VAT returns for accounting periods starting on or after 1 January 2023. It is important to comply irrespective of whether any tax is due. Any nil or repayment VAT returns received late will also be subject to late submission penalty points and financial penalties.

Points-based VAT penalty system

From Jan 2023 onwards, the process for late submission penalties will work on a points-based system. For each VAT return you submit late within a certain timeframe, you will receive one late submission penalty point.

Once a taxpayer reaches a certain penalty threshold, they will get a £200 penalty. After this a further £200 penalty will be issued for each subsequent late submission.

The late submission penalty points threshold will vary according to each taxpayer’s submission frequency.

Submission frequency         Penalty points threshold             Period of compliance

Annually                                                 2                                                                 24 months

Quarterly                                                4                                                                12 months

Monthly                                                  5                                                                  6 months

It will also be possible to reset points already awarded back to zero for the following scenarios:

• submit VAT returns on or before the due date for your period of compliance — this will be based on your submission frequency
• make sure all outstanding VAT returns due for the previous 24 months have been received by HMRC

Penalties for late VAT payment

After submitting the VAT return, if the actual VAT payment is not made on time, late payment penalties will be due. This applies even if the return was filed in time as was always the case. The amount will vary and the sooner a payment is made, the lower the penalty rate will be.

• Late payment up to 15 days overdue

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.

• VAT payment is between 16 and 30 days overdue

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.

• VAT payment is 31 days or more overdue

A first penalty will be payable, calculated at 2% on the VAT you owe at day 15, plus 2% on the VAT you owe at day 30.

A second penalty will then become payable on the remaining tax due. This is calculated at a daily rate of 4% per year for the duration of the outstanding balance. The second penalty is voided once the outstanding balance is paid in full, or once a payment plan has been agreed.

Grace period to become familiar with new VAT rules

As is often the case, HMRC is giving people some time to get used to the changes before the full penalties apply. There will be no first late payment penalty charges imposed for the first year from 1 January 2023 until 31 December 2023, provided that the VAT due is paid in full within 30 days of the payment due date.

How late payment interest will be charged

From 1 January 2023, HMRC will charge late payment interest from the day a VAT payment is overdue to the day the payment is made in full.

Late payment interest is calculated according to the Bank of England base rate plus 2.5%.

Introduction of repayment interest

Starting from 1 January 2023, the repayment supplement will be withdrawn.

For accounting periods starting on or after 1 January 2023, HMRC will pay taxpayers repayment interest on any VAT that is owed.

This payment will be calculated from the day after the due date or the date of submission (whichever is later) and until the day HMRC pays you the repayment VAT amount due in full.

Repayment interest will be calculated as the Bank of England base rate minus 1%. The minimum rate of repayment interest will always be 0.5% even if the repayment interest calculation results in a lower percentage.

If you would like some help with your VAT compliance, please get in touch via partners@rjp.co.uk