Are you aware of new penalties for late VAT returns?

Are you aware of new penalties for late VAT returns?

HMRC is introducing new penalties for late VAT returns from January 2023. The new rules also come as the way VAT is calculated changes.

Changes to the VAT system are radical because there will be two penalty systems implemented. One will deal with late returns while another will deal with VAT that has not been fully paid.

Who will penalties for late VAT returns affect?

If you are VAT registered and submit a VAT return for an accounting period afrer 1 January 2023, then the new regime will affect you.

Even if your return is for zero or repayment VAT returns, you will also incur late submission penalty points and fines.

The changes: Penalty points for late VAT returns

Points mean penalties according to HMRC with this new generation of rules. Businesses will receive one point for each late return submitted. Similar to totting up points on your driving licence leading to a ban, if your points add up to a certain threshold you’ll then receive a £200 fine!
This threshold all depends on how often your returns are submitted.

Type of returnThreshold
AnnualTwo points
QuarterlyFour points
MonthlyFive points
New thresholds for VAT penalties

HMRC has set these thresholds so that the earliest date for any late return penalty will be 7 July 2023.
You can reset your points to zero if you:

  • Submit your returns by the due date for your term of compliance, which depends on how frequently you do so.
  • Ensure HMRC has received all outstanding returns for the past 24 months.

The changes: Late payment penalties

Paying your VAT on time has always been advisable. But under the new regime it will really cost you in the long run if you don’t pay early. Here’s what you need to know:
Payments up to 15 days overdue: Paying what you owe in full between days 1 and 15 means not incurring a penalty.
Payments 16 and 30 days overdue: If you pay in full or arrange a payment plan, you will avoid the first penalty, which is 2% of the VAT owed on day 15.

Payments more than 31 days overdue: You will incur a first penalty of 2% on the VAT owed from day 15 as wall as 2% on what was owed as of day 30. For as long as the amount remains unpaid, a second penalty will be assessed to you. This will be calculated at a daily rate of 4% per annum. This amount is determined when a payment plan or the whole debt due is agreed upon.

Time to Pay arrangements

A new feature of the tax regime is that HMRC will acknowledge Time to Pay (TTP) arrangements. This effectively stops the penalty clock and is treated the samw way as making payment.

If the TTP application is successful, the date that it was first requested will be treated as the date of payment. But beware, if the TTP agreement is broken, the first and second late payment penalties will be charged as if the TTP had never taken effect. Missing even one scheduled payment could mean full penalties are charged, even if you’ve paid previous instalments on time.

Interest for late payments

From the day your payment is overdue until the day it’s paid in full, HMRC begins charging late payment interest. It will be worked out as the Bank of England base rate plus 2.5%. With interest rates now at 3% that could be a sizeable amount to pay on top of penalties.

Repayment interest introduced

Also from 1 January 2023, the repayment supplement is no longer available. Instead, HMRC is introducing repayment interest on any VAT owed. This is calculated from the day following the submission deadline or the due date – whichever comes first – and continuing until the day HMRC fully pays you the refunded VAT amount.

HMRC will determine the repayment interest as the Bank of England base rate minus 1%.

If you would like advice on VAT and how Xero can help you contact us today using the form below.