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The VAT default surcharge penalty system is being replaced by new penalties for returns that are submitted late and for VAT due which is paid late. The changes apply to accounting periods starting on or after 1 January 2023.
Late Submission of VAT Returns
In a change from the current system, where only late VAT payments are penalised, the new system targets late VAT returns as well, including nil or repayment returns.
From 1 January 2023, you’ll get penalty points if you submit a VAT return late. For each return you submit late you will receive a penalty point. Once you’ve reached a penalty point threshold, you’ll receive a £200 penalty and a further £200 penalty for each subsequent late submission while you’re at the threshold.
The penalty point threshold is set by your accounting period. The threshold is the maximum points you can receive.
The points thresholds are:
| VAT Return submission frequency | Penalty threshold |
| Annual | 2 points |
| Quarterly | 4 points |
| Monthly | 5 points |
You can check details of penalties in your VAT online account and ask HMRC for a review through your online account.
Penalty points will have a lifetime of two years, after which they will expire. The period is calculated from the month after the month in which the failure occurred, e.g. submission due January 2023, so the penalty point will expire in February 2025.
Late Payments
For VAT return periods starting on or after 1 January 2023, late VAT payments will attract both interest and penalties.
HMRC will charge interest from the day the VAT payment is due up to the date of payment in full at a rate of interest of Bank of England base rate plus 2.5%.
The late payment penalty takes account of the length of the delay in making payment and the penalty increases over time, see the table below.
| First late payment penalty | Second late payment penalty | |
| Payment up to 15 days overdue | None | None |
| Payment between 16 and 30 days overdue | Calculated at 2% on the VAT you owe at day 15. | None |
| Payment 31 days or more overdue | Calculated at: • 2% of what was outstanding at day 15 • plus 2% of what is still outstanding at day 30 | Calculated at •a daily rate of 4% per year on the outstanding balance •charged every day from day 31 until the outstanding balance is paid in full |
HMRC ‘soft landing’ Period
To allow VAT registered businesses to become familiar with the new regime, HMRC has advised that it will not charge a first late payment penalty during 2023, provided that businesses pay in full within 30 days of the payment due date.
How to reduce or avoid a late payment penalty:
There are steps you can take to reduce or avoid getting a penalty.
1. Submit the return by the due date, even if you cannot afford to pay as this mitigates the late submission penalties
2. Time to Pay agreements: where you cannot pay the liability by the due date and you need extra time, contact HMRC at the earliest possible opportunity to agree a TTP arrangement. The longer it takes to do this, the higher the late payment penalty will be.
3. Make part-payments: Penalties are charged according to tax owed at the end of days 15 and 30. If you cannot pay in full, then a part payment will reduce the cost of any late penalty notice and interest charge.
How we can help you
Many clients that we work with are in a repayment position and haven’t in the past had to consider the previous surcharge penalty regime. You may wish to review the reason behind any previous late submissions and put in place procedures to prevent any future delays. We can assist you by undertaking a review of past late returns and offering suggestions for improvements to current procedures.
Meeting deadlines has now taken on increased importance for all organisations. We regularly support our clients in simplifying and reducing the time they spend on their VAT return workings. If you feel that your VAT return methodology is over complicated or taking up a disproportionate amount of time, please get in touch with us.
Should you be issued with a penalty, we can look at the circumstances involved and consider whether you are able to make a reasonable excuse appeal to HMRC.
Further Information
Further details can be found on HMRC’s website, following these links.
Penalty points and penalties if you submit your VAT Return late