Following the implementation of Making Tax Digital (MTD) for VAT in 2019, HMRC announced intentions to alter the VAT penalty system to align it with the penalties for late income tax and corporation tax filing and payment.
HMRC announced in January 2022, after multiple delays, that a new penalty scheme would begin in January 2023. We’ll go over the current rules and what to expect when the new points-based system goes live.
Current VAT penalties for late payments
Late payment and late filing of VAT returns are both subject to the present surcharge system. The amount of the surcharge varies based on how many times you have failed to pay your VAT, as shown in the table below:
|Defaults within 12 months||Surcharge if annual turnover is less than £150,000||Surcharge if annual turnover is £150,000 or more|
|1st||No surcharge||No surcharge|
|2nd||No surcharge||2% (no surcharge if this is less than £400)|
|3rd||2% (no surcharge if this is less than £400)||5% (no surcharge if this is less than £400)|
|4th||5% (no surcharge if this is less than £400)||10% or £30 (whichever is more)|
|5th||10% or £30 (whichever is more)||15% or £30 (whichever is more)|
|6 or more||15% or £30 (whichever is more)||15% or £30 (whichever is more)|
HMRC is also entitled to charge penalties up to:
- 100% of any tax under-stated or over-claimed if you send a VAT return that contains a careless or deliberate inaccuracy
- 30% of a VAT assessment if HMRC sends you one that’s too low and you do not tell them it’s wrong within 30 days
- £400 if you submit a paper VAT return, unless HMRC has told you that you’re exempt from submitting your return online
The new penalty points system for VAT from 2023
The new VAT penalty system was supposed to start at the end of the ‘soft landing period’ in 2021, but it was postponed until April 2022 to coincide with the extension of MTD for VAT. However, HMRC has indicated that the implementation would be delayed for another nine months. For all VAT periods beginning on or after January 1, 2023, the new regulation will apply to MTD for VAT filings.
Each late VAT submission will earn one penalty point under the new penalty points system. The following thresholds, which are based on how frequently the business submits its VAT returns, will result in a £200 fine from HMRC.
- Two accumulated points for missed annual VAT returns
- Four accumulated points for missed quarterly VAT returns
- Five accumulated points for missed monthly VAT returns
Penalty points will last for two years before they expire.
As well as penalties for late submissions, new penalties for late payment will also apply, as follows:
- 0-15 days: no penalty
- 16-29 days: 2% of the amount outstanding
- 30 days: 2% of the tax outstanding at day 15 plus 2% of the tax outstanding at day 30
If any tax is still unpaid on day 31, an additional penalty will be incurred. This will accrue daily, at a rate of 4% per annum on the outstanding amount.
HMRC will allow taxpayers to request a Time to Pay Arrangement, which, if approved, will prevent penalties from accruing from the time the person contacts HMRC.