UK’s new VAT penalty regime as of January 2023

A new system of penalties and VAT interests will be introduced by HMRC and will replace the previous Default Surcharge system.

The change will apply to reporting periods which commence on January 1st, 2023. Contrary to the previous system, penalties will be divided into two types: one for late submission of VAT returns and the other one for making late payments. You will find a new scheme for calculating penalties for both types below.

Penalty resulting from a late VAT return

It will be applied in accordance with a new penalty points system. For each delay in submitting a VAT return, the taxpayer will receive 1 penalty point. If they exceed the thresholds listed below, HMRC will impose a £200 penalty. Each subsequent late declaration will result in receiving an equally high penalty (i.e. £200).

Expiry of all points after the period of compliance*:

with an annual submission frequency and a penalty threshold of 2 points, the period is 24 months;

with a quarterly submission frequency and a penalty threshold of 4 points, the period is 12 months;

with a monthly submission frequency and a penalty threshold of 5 points, the period is 6 months.

*As long as all returns are submitted on time for the period of compliance and the tax payer makes sure that HMRC has received all outstanding returns from the preceding 24 months

Penalty for late payment of VAT

It will be applied based on the length of the period after which the taxpayer settled their VAT liability.

within up to 15 days of the due date - HMRC will not impose a penalty (if VAT is paid in full within this time period or the taxpayer agrees on a repayment plan with the office);

within 16 to 30 days of the due date - HMRC will impose a 2% penalty (calculated based on the amount of tax due);

within 31 days and more of the due date - the penalty will increase to 4% (the first penalty imposed on the 15th day and the next penalty imposed on the 30th day). HMRC will impose a second penalty, charged daily at 4% per annum for as long as the balance is outstanding. It will cease to be charged when the taxpayer pays the outstanding balance in full or agrees on a repayment plan with the office.

HMRC has also confirmed that for the first year when new rules apply, the first late payment penalty will not be charged. This means that if the taxpayer settles their tax liability within 30 days after the payment deadline, the office will not impose a penalty. Please note, however, that this exception will apply until December 31, 2023 only.

The official guidelines for the new penalty system can be found here.