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New Year, New VAT Penalty Regime

by Andrew Stanton

22 December 2022

HMRC is introducing a new VAT penalty and interest regime which will affect all VAT registered businesses from 1 January 2023. The changes will apply to the late submission and / or late payments of VAT returns for VAT return periods beginning on or after 1 January 2023.

HMRC have welcomed 2023 with a new VAT penalty regime.

The new VAT penalty regime is structured to encourage VAT registered businesses to file and pay on time. It will also separate late submission fees from late payment fees.

The new system will penalise repeat late penalties more harshly than those who may miss an occasional deadline. However, it should be noted that it is slightly more complex than the current system and affects the filing process.


The new penalty regime charge for late VAT returns

The new penalty scheme will follow a points-based system where taxpayers will receive a penalty point per late VAT return submission. A set number of penalty points are allowed. Once you have reached your threshold (determined by the frequency of VAT returns), HMRC will start charging penalties. The threshold points are shown below:

• Annual VAT returns: Two points

• Quarterly VAT returns: Four points

• Monthly VAT returns: Five points


The new points-based system will impact anyone submitting a VAT return for accounting periods beginning or after 1 January 2023.

If taxpayers meet the above-mentioned penalty-point limits, they will receive a £200 penalty. Furthermore, if there are additional late submissions, no further points will be added, but businesses will receive another £200 penalty per subsequent late submission.

All taxpayers will be allowed to reset their penalty point tally. However, this will only be permitted once HMRC has received any outstanding VAT returns for the previous 24 months. In addition, businesses must also have submitted on-time returns for 24 months (if submitting annual returns), 12 months (if submitting quarterly), or 6 months (if submitting VAT returns monthly).

HMRC elaborated on the VAT penalty reform and stated that the intention is to improve the collection of outstanding VAT. The most significant change in the penalty system is that tiered penalties may encourage sooner payments, as the penalties will be lower.


New penalties and interests for late VAT payments

Starting on periods on or after 1 January 2023, the new penalty regime will also include both interest and penalties for late VAT payments. Interest is charged at the base rate determined by the Bank of England, plus 2.5% from the day the payment is due until the payment date is in full. This will apply to all VAT-registered businesses in the UK, even where a business may have a Time To Pay (TTP) arrangement.

Aside from the interest, no late payment penalty will be charged if the VAT is paid within 14 days of the due date. If the late payment exceeds 14 days, there will be a penalty charge of 2% of the VAT outstanding (on day 15). A further 2% will be added on day 30. If the late payment surpasses day 30, a daily penalty of 4% per annum will apply until the VAT is paid in full.



If you would like further guidance on the new HMRC VAT changes or need help with this area of tax, please don’t hesitate to get in touch with myself or your usual Ecovis contact.

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