VAT Penalties – Compliance
Review of the former penalty points system
Businesses that have been registered for VAT for many years will remember the former VAT penalty regime governing the late submission of returns or the payment of VAT due. This was based on default penalty surcharges (financial penalties) being issued on an escalating scale to a maximum of 15% of the value of the related VAT return, with reference to the number of offences in a 12-month period. This was, however, widely believed to be an unjust penalty system surrounding VAT accounting periods.
This is because, the system failed to reflect how late a return was filed or paid. The same penalty “strike” was applied by HMRC whether a deadline was missed by a day, a month, or a year. The value of the penalty was also based on the value of the related VAT return so could represent a harsh cost for a business in an unusually high payment position whilst being nil for a business in a repayment position. Therefore, the same non-compliant event by two different businesses could result in a different financial penalty pay arrangement.
A new penalty regime was introduced as of 1 January 2023 with the intention of introducing a simpler and fairer regime. It works on a penalty point based system and is designed to be less severe on businesses that miss the occasional deadline while still penalising repeat offenders. It was also hoped that the revised penalty system would reduce the time spent by HMRC on penalty surcharge reviews.
How does the VAT penalty system work now?
The new system has separate penalties for late submission and late payment of VAT returns.
1. Late filing penalties
From 1 January 2023, HMRC will issue a penalty point to any business that fails to submit a VAT return by the required deadline.
It is important to note that a penalty point will be issued for the late filing of all VAT returns, even those which result in no payment being due to HMRC e.g.:
- Nil returns; and
- Repayment returns.
When the penalty point threshold is reached, HMRC will issue a £200 penalty and a further £200 penalty for each subsequent late VAT return submission.
The relevant threshold is determined by your VAT return reporting frequency:
| Accounting period | Penalty points threshold |
|---|---|
| Annually | 2 |
| Quarterly | 4 |
| Monthly | 5 |
Penalty points for late submission will remain on account for two years. It is possible to request an HMRC review of any penalty points incurred if there is a reasonable excuse for the filing deadline being missed.
2. Late payment penalties
A financial penalty is separately applied for the late payment of VAT due to HMRC but only after the initial grace period is exceeded. Up until 31 December 2023, HMRC did not implement a first late payment penalty if payment was received within 30 days. From 1 January 2024, the grace period was reduced to 15 days.
If the VAT payment is made later than 15 days after the due date, penalties are applied as shown in the table below:
| Penalty date | Penalty |
|---|---|
| Up to 15 days | No penalty |
| 16-30 days | 2% of the amount due |
| More than 30 days | Further 2% of the amount due |
| From day 31 | Charge of 4% p.a. applied daily |
3. Late payment interest
Late payment interest is charged in addition to the late payment penalties. Interest is charged by HMRC from the first day after the payment is due until the full settlement amount is received. It is still applied by HMRC when time to pay agreements are set up.
HMRC charges interest based on the bank of England interest rate plus 2.5%.
How to avoid late payment penalties and interest charges
Know and respect your VAT deadlines
The best way to avoid any non-compliance charges is to ensure that all your VAT returns are filed on time and any VAT payments due to HMRC are made by the payment deadline. You may also want to:
- Document a VAT filing and payment process to ensure deadlines can still be met even if your usual VAT team are sick or on holiday.
- Consider setting up a direct debit to pay your VAT liabilities automatically.
- Seek professional advice early if queries are delaying the completion of the VAT return.
Minimise HMRC penalties
If you anticipate being unable to pay your VAT liability, the best course of action is to file your VAT return by the due date and call HMRC to discuss a time to pay agreement.
If a payment agreement is established at an early stage, it can result in only late payment interest charges being due to HMRC.
How can we help your business?
Our team of experienced VAT advisors at Johnston Carmichael can provide advice relevant to your VAT compliance issues or any other VAT queries that you may have.
We can provide you with the information you need to make informed decisions to reach the most beneficial VAT outcome for your business. Please don't hesitate to reach out to myself, a member of our VAT team, or your usual Johnston Carmichael adviser. You can also fill out the short form below.
