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Upcoming changes to VAT penalties and VAT interest charges

HMRC has recently issued guidance on the new VAT penalties and interest charges that will apply to VAT periods starting on or after 1 January 2023.

Changes to the VAT penalty system had been due to take effect from April 2022 but were delayed by nine months because of the Covid-19 pandemic.

For VAT periods starting on or after 1 January 2023, the default surcharge will be replaced by new penalties if a VAT return is submitted late or VAT is paid late.

Any nil or repayment VAT returns received late will also be subject to late submission penalty points and financial penalties. This differs to the current regime where no penalty is issued in these situations.

This is a significant change to the penalty regime and HMRC understand this. As a result HMRC will not charge a first late payment penalty in the first year from 1 January 2023 until 31 December 2023, as long as the business pays in full within 30 days of its payment due date. This is to allow businesses to adapt to the changes.

Submitting a late VAT return

Businesses will receive one late submission penalty point for each VAT return submitted late. Once a penalty threshold is reached, there will be a standard £200 penalty and a further £200 penalty for each subsequent late submission. The late submission penalty points threshold will vary according to submission frequency.

The penalty points can be reset to zero if all returns are submitted on time in the appropriate period of compliance (varies subject to filing frequency) and any outstanding returns in the previous 24 months have been received by HMRC.

Not paying VAT on time

In addition to the late filing penalties, there are late payment penalties. These are:

  • On or between days 1 and 15 - no penalty will be charged if the VAT owed is paid in full or a payment plan is agreed
  • On or between days 16 and 30 - the first penalty will be calculated at 2% on the VAT owed at day 15 (if the outstanding amount is paid in full or a payment plan is agreed on or between days 16 and 30)
  • At 31 days or more overdue - the first penalty will be calculated at 2% on the VAT owed at day 15 plus 2% on the VAT owed at day 30. A second penalty will be calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full, or a payment plan is agreed.

Late payment interest charges

HMRC will also charge late payment interest from 1 January 2023. This will be charged from the day a payment is overdue to the day a payment is made in full. This will be calculated as the Bank of England base rate plus 2.5%.

Repayment interest

Finally, HMRC is withdrawing the repayment supplement from 1 January 2023 and introducing repayment interest in its place. Repayment interest will be paid by HMRC on any VAT that a business is owed for accounting periods starting on or after 1 January 2023. It will be calculated from the day after the due date or the date of submission (whichever is later) and until the day HMRC pays the repayment VAT amount due in full. This will be calculated as the Bank of England base rate minus 1% with a minimum rate of repayment interest of 0.5% even if the repayment interest calculation results in a lower percentage.

You can read HMRC’s guidance here: https://www.gov.uk/guidance/prepare-for-upcoming-changes-to-vat-penalties-and-vat-interest-charges

More detailed guidance about the changes to VAT late submission penalties, late payment penalties and VAT interest charges will be published in December 2022. We will update you again when the guidance is released.

For further information, please contact Alison Buckley to the right of this page.

Written June 2022.

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