A new VAT penalty system

VAT penalty system

A new VAT penalty system

A significant overhaul of the VAT penalty system came into effect on 1 January 2023, with new changes to how penalties are applied and how to calculate and pay interest. 

Let us break down what you need to know about the changes.

What is changing in the VAT penalty system? 

The main change for businesses is a replacement of default surcharges with new penalties for late submissions and late payments. 

The objective is to reward businesses that comply with their VAT obligations on time. Additionally, the calculation and payment of VAT interest have changed.

Who is affected by the VAT changes? 

Every business submitting their VAT returns on or after 1 January 2023 is affected. Companies must note that these changes may affect their tax planning strategy and potential savings from earlier payment dates.

How do the new VAT penalties work? 

HM Revenue & Customs (HMRC) has outlined a points-based system for late submission penalties intended to incentivise businesses to comply with their reporting obligations:

Up to 15 days overdue

You will not get charged a penalty if you pay the VAT you owe in full or agree on a payment plan on or between days 1 and 15.

Between 16 and 30 days overdue

You will receive a first penalty of 2% on the VAT you owe on day 15 if you pay in full or agree to a payment plan on or between days 16 and 30.

31 days or more overdue

You will receive a first penalty calculated at 2% on the VAT you owe on day 15 plus 2% on the VAT you owe on day 30.

You will receive a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance, calculated when the outstanding balance is fully paid or a payment plan is agreed upon.

The frequency-dependent thresholds for penalty points mean that systematic non-compliance results in higher penalties. However, should a business meet its obligations within the given timeframe, all penalty points are reset back to zero, and no further action will occur.
Businesses should also take note of the benefits associated with paying their VAT sooner rather than later. Paying early means fewer late payment fees and interest due.

Business owners who pay late but manage to file their returns ahead of the deadline can reduce their overall financial burden by paying any outstanding taxes before incurring interest charges or late payment fees.

With the new year upon us, businesses must be aware of the possible consequences of late returns and payments. Our VAT experts are on hand to help you meet your obligations, please contact us with your questions.