Prepare for upcoming changes to VAT penalties and VAT interest charges

Talk to our team

17 June 2022

Prepare for upcoming changes to VAT penalties and VAT interest charges

Her Majesty’s Revenue and Customs (HMRC) has confirmed the default surcharge for submitting value-added tax (VAT) returns or paying VAT late will be replaced by new penalties, for VAT periods starting on or after 1 January 2023. The way VAT interest is calculated will also be changing.

Who is affected?

The changes will affect everyone submitting VAT Returns for accounting periods starting on or after 1 January 2023.

Any nil or repayment VAT returns received late will also be subject to late submission penalty points and financial penalties.

If you submit your VAT return late

If a VAT return is submitted late, the associated penalties will work on a points-based system. For each VAT return that’s submitted late, one late submission penalty point will be applied. Once a penalty threshold is reached, a £200 penalty will be charged, along with an additional £200 for every other late submission.

The table below shows how the late submission penalty points threshold will vary based on the frequency of submissions:

Submission frequency	Penalty points threshold	Period of compliance
Annually	2	24 months
Quarterly	4	12 months
Monthly	5	6 months

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

submit your returns on or before the due date for your period of compliance — this will be based on your submission frequency
make sure all outstanding returns due for the previous 24 months have been received by HMRC

If VAT isn’t paid on time, the sooner the amount is paid, the lower the associated penalty rate.

Time overdue	Penalty rate
Up to 15 days	No penalty if the VAT owed is paid in full or a payment plan agreed on or between days 1 and 15
16 - 30 days	First penalty calculated at 2% of the VAT owed at day 15 if VAT is paid in full or a payment plan agreed on or between days 16 and 30
31 days or more	First penalty calculated at 2% on the VAT owed at day 15, plus 2% on the VAT owed at day 30. A second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full, or a payment plan is agreed

Period of familiarisation

To give taxpayers time to get used to the changes, HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if you pay in full within 30 days of your payment due date.

From 1 January 2023, late payment interest will be charged from the day payment is overdue to the day payment is made in full. Late payment interest is calculated at the Bank of England base rate plus 2.5%.

HMRC has also advised that the repayment supplement will be withdrawn from 1 January 2023. For accounting periods commencing on or after 1 January 2023, HMRC will pay repayment interest on any VAT that’s owed. Repayment interest will be calculated as the Bank of England base rate minus 1%, and the minimum rate of repayment interest will sit at 0.5%.

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

Please contact our offices in Wirral, Liverpool and Chester if you have any questions about these changes.