VAT penalties from January 2023

VAT is one of the most complicated areas of tax in the UK, and the complexities are set to increase from January 2023 as HMRC introduces its new VAT penalty regime.

Importantly, these new VAT penalties are in addition to the recent rule changes requiring VAT-registered businesses to submit returns using Making Tax Digital (MTD) compliant means.

These new penalties will be issued in response to the following:

• When VAT returns are submitted late
• When VAT is not paid to HMRC by the due date

In this guide, we will look in more detail at the new VAT penalties, and some essential information to ensure you are prepared from 2023 onwards.

• Related: Get a free review of your VAT claim

How will the new VAT penalties work?

Late submission penalties will work on a points-based system. You will receive one late submission penalty point for each VAT return that is submitted late.

Once a penalty threshold is reached, you will receive a £200 penalty and a further £200 penalty for each subsequent late submission. ‘Nil’ VAT returns and repayment returns will also be subject to penalty points and penalties.

What is the VAT penalty point threshold?

The late submission penalty points threshold will vary according to your VAT return submission frequency.

Can VAT penalty points be reduced/removed?

Any VAT penalty points total can be reset to zero at any time once a customer has met the following two conditions:

• VAT returns are submitted on or before the due date for a period based on their submission frequency (see ‘period of compliance’ in the table above)
• All returns that were due within the preceding 24 months have been received.
• If the points threshold is not reached, each individual point will automatically expire after 24 months.

Are there additional penalties for late VAT payments?

There are additional penalties for late VAT payments. These penalties are based on how late payment is when it is received by HMRC. The later the payment is made, the higher the penalty rate will be.

A second penalty is calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated based on the date the outstanding balance is paid in full or a payment plan is agreed.

Note: HMRC will not be charging a first late payment penalty 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.

VAT late payment interest charges

From 1 January 2023, HMRC will charge late payment interest from the day a payment is overdue to the day the payment is made in full.

• Late payment interest is calculated at the Bank of England base rate plus 2.5%.
• The repayment supplement will also be withdrawn from 1 January 2023.
• For accounting periods starting on or after 1 January 2023, HMRC will pay repayment interest on any VAT that is owed e.g., following the submission of a repayment return.

This will be calculated from the day after the due date or the date of submission (whichever is later) until the day HMRC makes a repayment of the VAT amount due in full.

Repayment interest will be calculated at the Bank of England base rate minus 1%. The minimum rate of repayment interest will always be 0.5% even if the repayment interest calculation results in a lower percentage.

• Learn more about Outstanding VAT Returns and Late Payments

Making Tax Digital and VAT – don’t risk a separate penalty

Separately to the new VAT penalty regime of January 2023, November 2022 saw the introduction of new rules mandating the use of Making Tax Digital (MTD) compatible software to keep VAT records and the filing of VAT returns.

Failure to comply with the new MTD for VAT rules may lead to a penalty of £400 per VAT return in addition to daily penalties of up to £15.

• Learn more about Making Tax Digital and VAT in our detailed blog.