New VAT late-filing penalties

All VAT returns must now be submitted digitally using MTD compatible software (unless the business has an exemption) so the VAT penalties have been revised to fit with this new regime.

If you submit a VAT return late for a period starting on or after 1 January 2023 the HMRC computer will automatically allocate a late-filing 'point' but not a monetary penalty. Only when you have collected several points will you receive a flat £200 penalty.

The penalty threshold depends on how regularly you file your VAT returns:

quarterly returns: 4 points;

monthly returns: 5 points; and

annual returns: 2 points.

Businesses that file quarterly VAT returns become liable to pay a £200 penalty when they file the fourth VAT return late. Each subsequent late VAT return triggers another £200 late-filing penalty until the points slate is wiped clean by a period of perfect compliance.

Perfect compliance is achieved by completing all outstanding VAT returns and filing all VAT returns on time for twelve months. Annual and monthly filers have different periods to meet for perfect compliance.

It does not matter whether the VAT return shows a repayment or VAT owing - if it is delivered late a point or penalty is charged. There is no soft-landing for the new system of late-filing penalties.

The old system of surcharges for late paid VAT does not feed into the new late-filing penalty system.

New VAT late-payment penalties

In addition to the new penalties for late VAT returns (see above) there is also a new system of penalties for late paid VAT.

For VAT periods beginning on and after 1 January 2023 you will have up to 15 days to pay your VAT - or arrange a time to pay agreement - before HMRC charge a penalty. In 2023 this 15-day grace period will be stretched to 30 days while traders get used to the new system.

From 2024 onwards the penalties are calculated as 2% of the unpaid VAT at day 15 and a further 2% of the unpaid VAT at day 30. If no payment is made until after day 30 the first penalty will be 4% of the amount due. However if full payment is made between days 15 and 30 the first penalty will be set at 2%.

From day 31 another penalty is charged daily based on an annual rate of 4% of any outstanding VAT due.

In addition to the penalties charged for paying late, interest is charged on any late payment at the Bank of England base rate plus 2.5% (so currently 6.5%). If you are due a VAT repayment which HMRC does not pay on time you will receive repayment interest at the Bank of England base rate minus 1% (currently 3%).

This is a much fairer system than the old VAT default surcharges which could see traders hit with penalties of up to 15% of the late paid VAT for paying just one day late. There is no carry forward of default periods or surcharge levels from the old VAT penalty system into the new late-payment regime.

Last updated: March 1st 2023.