Insight: HMRC’s new VAT penalty regime and the increased cost of non-compliance

As VAT specialist Martin Kerr outlines in Consilium’s latest insight report, late submission or payment is about to become a lot more costly due to HMRC’s new VAT penalty regime.

What is HMRC’s new VAT penalty regime?

HMRC is introducing a new VAT penalty regime for periods starting on or after 1 January 2023. This will change how VAT penalties and interest are charged to a points-based system, which will also apply to nil returns and repayment returns.

Consilium Chartered Accountants break down HMRC's new VAT penalty regime starting 1 January 2023. consiliumca dot com

For each late submission, you will receive one penalty point. A financial penalty will then be applied when you breach a penalty point threshold. The thresholds for the VAT penalty regime will depend upon your VAT return submission frequency:

Annual returns1 penalty point
Quarterly returns4 penalty points
Monthly returns5 penalty points

Breach the threshold and you will receive a £200 penalty. An additional £200 penalty will also be applied for any subsequent late returns.

Can VAT penalty points be reset?

Assuming that outstanding returns are brought up to date and subsequent returns are submitted on time, the points are reset to zero. Returns must be submitted on time for a specific period, once again based on the VAT return submission frequency:

FrequencyPeriod for points reset
Annual returns24 months or two returns
Quarterly returns12 months or four returns
Monthly returnsSix months or six returns

Failure to comply with these periods would mean retention of the penalty points. At present, there is no expiration date for penalty points.

Additional VAT penalties for late payment

Under the new VAT penalty regime, additional penalties can also be applied for late payment of any VAT amounts due. The calculation is based on how late the payment is.

Overdue periodPenalty
Up to 15 days lateNo penalty if VAT is paid or a payment plan is agreed upon between days 1 and 15 after the due date
16 to 30 days lateA penalty of 2% of the outstanding VAT owed on day 15 if paid in full or a payment plan is agreed upon between 16 and 30 days after VAT is due
30+ days lateA penalty of 2% of outstanding VAT owed on day 15 and a further 2% penalty on the outstanding VAT due at 30 days

Additionally, HMRC will charge a further daily penalty amount until the VAT is settled. The daily penalty will be at 4% per annum, calculated daily.

The new VAT penalty regime is applied on top of the traditional late payment interest charged by HMRC. Until the VAT payment is settled, HMRC will apply interest at 2.5% above the Bank of England base rate which currently stands at 3.5% (as of 15/12/2022). This time last year the base rate was 0.25%. Combined with the new points-based penalties, late payment has become a whole lot more costly.

HMRC confirms soft-landing period and the end of the repayment supplement

HMRC has announced a soft-landing period to allow businesses to get used to the new rules. Late payment penalties will not be charged if the VAT is paid in full within 30 days of the due date, for the first 12 months (i.e. to 31 December 2023). Note, however, that the interest charged on the late payment will still be applied, and at a much higher rate than in recent years.

Previously, HMRC provided a repayment supplement – a form of compensation – to businesses that had overpaid VAT. As part of the new VAT penalty regime, from 1 January 2023, this will be replaced with repayment interest.

Repayment interest will be paid by HMRC on VAT that is owed to a business. This will be applied to VAT refunds from the later of either the VAT submission due date or the actual submission date until HMRC makes the full VAT repayment. The interest rate for the repayment will be the Bank of England base rate less 1% but at a minimum of 0.5% if interest rates return to very low levels.

Do you need help with the new VAT penalty regime?

Consilium Chartered Accountants are working with a wide range of businesses to prepare them for the new VAT penalty regime. Enhanced reporting, support with VAT returns, and better business planning are just some of the ways Consilium is helping clients prepare for these significant changes.

If you are concerned about the new VAT penalty regime or would like to talk to a VAT specialist about your situation, please contact Martin Kerr to arrange a free virtual or in-person meeting.

Martin Kerr
Associate Director
Accounting and Business Services
Click to Contact
0141 204 6650

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