UK new VAT penalty and surcharges system for VAT register

What are the new VAT penalty and surcharges system?

HMRC interduce penalties  and surcharges for VAT periods starting on or after 1 January 2023. It is replacing the default surcharge and penalty system for late returns and late payment of VAT.  HMRC VAT also is introducing a new approach to charging interest on late-paid VAT UK.

From 1 January 2023, separate penalties apply for the late submission of a VAT return and the late HMRC VAT payment. Therefore, even a VAT return is in a credit position or nil. There penalty applicable for a late submission.

HMRC has confirmed that there will be a soft-landing period of 12 months. Which means that they will not be charging a first late VAT penalties in the first year. If the outstanding amount is paid within 30 days of the normal due date.  We recommend that our clients do not get into the habit of using this soft-landing period.  VAT register clients will cashflow benefit. It  will get into the habit of submitting returns and paying on time for every return.

If you submit your VAT return late

Any Nil or repayment VAT returns received will treating late. It will also subject to late submission penalty points based system and financial penalties. For each VAT Return you submit late you will receive one late submission penalty point.

Once a penalty threshold is reached.  You will receive a £200 penalty and a further £200 penalty for each subsequent late submission.

The late submission penalty points threshold will vary according to your submission frequency.

You will be able to reset your points back to zero if you:

VAT returns submit on or before the due date for your period of compliance. This will base on your submission frequency. Make sure all outstanding returns due for the previous 24 months have been received by HMRC

Late VAT payments

For late Pay VAT, the applicable penalty rate depends on how soon you have made the VAT payment.

• Up to 15 days overdue: during this period, taxpayers do not receive a penalty. If they pay the VAT in full or agree on a payment plan with HMRC.
• Between 16 and 30 days overdue: taxpayers will receive an initial penalty calculated at 2% on the VAT due or agree a payment plan.
• VAT is unpaid after 30 days: the penalty increases up to 4%. If you will receive a first penalty calculated at 2% at day 15 days, plus 2% on the VAT due by day 30. You will receive a second penalty calculated at a daily rate of 4% per year. This duration is bases on outstanding balance. This is calculated when the outstanding balance is paid in full, or a payment plan is agreed.

Penalty calculations

CGSD, an IT consultant, submitted his VAT return for March 2024 before 7 May 2024 – the filing and payment deadline. But did not pay his tax liability of £100,000 until 7 August 2024 i.e., three months late.

CGSD will be charged 2% penalties at the end of days 15 and 30 after the due payment date. An annualised penalty of 4% for the next two months.

Total penalty:

(£100,000 x 4%) + (£100,000 x 4% x 2 months/12 months) = £4,666

How late payment interest will be charged?

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

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

Finally, in order to make the introduction of the new system smoother. HMRC grants a transition period beginning from 1 January 2023 until 31 December 2023. During this period, HMRC will not charge a first late payment penalty. If the taxpayer pays the VAT amount within the first 30 days after the deadline.

More detailed guidance about the changes to VAT late submission penalties, late payment penalties and VAT interest charges will be published in December 2022.

If you would like to discuss your circumstances, you can contact our VAT team by calling one of our offices or emailing: [email protected]