Are you aware of changes to VAT penalties and VAT interest charges?

18 May 2022

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. 

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

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

The first late payment penalty will not be charged for the first year, from 1 January 2023 until 31 December 2023, if payment is made in full within 30 days of the payment due date. This will be known as the ‘period of familiarisation’. 

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HMRC has also advised that the repayment supplement will be withdrawn from 1 January 2023.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%. 

Information provided in this news article may be subject to change. Please make note of the date of publication to ensure that you are viewing up to date information.