VAT Penalties and Interest charges – new regime from 1 January 2023

***Updated  on 17 January re late penalties and Payments on Account***

Just a reminder that the 3 new systems are now in place -

• A points system – for late submission
• A penalty system – for late payment of VAT liabilities
• Late payment interest – for late payment of VAT liabilities

There are also changes to how repayment interest is calculated for overpayments or late refunds of VAT.

HMRC has issued a number of notes explain the new systems which aims to simplify and separate penalties and interest.

• Penalty points and penalties if you submit your VAT Return late
• Remove penalty points you’ve received after submitting your VAT Return late
• How late payment penalties work if you pay VAT late
• Late payment interest if you do not pay VAT or penalties on time
• Repayment interest on VAT credits or overpayments

 At a high level the new points system works as follows:

• It applies to VAT accounting periods starting on or after 1 January 2023
• You get a penalty point for each late VAT return
• Once you’ve reached a penalty point threshold, you’ll receive a £200 penalty and a further £200 penalty for each subsequent late submission while you’re at the threshold – for quarterly returns the threshold is 4 points, for monthly returns 5 points
• Penalty points take 24 months to expire.

At a high level the new penalty system works as follows:

• It applies to VAT accounting periods starting on or after 1 January 2023
• It applies to payments due in relation to
  • the VAT Return
  • amendment to or correction of a VAT return
  • VAT assessment issued by HMRC
  • But NOT payments on account that are paid late – these are covered by the late payment of the VAT return itself 

    (CH193020 - Penalty reform: penalties for failure to pay VAT on time from 1 January 2023: overview says:  “For Payments on Account and Annual Accounting customers, late payment penalties will only apply to the balancing payment which remains unpaid after the due date for the relevant accounting period.”)

• Payment is calculated from day 15 at 2% raising to 4% per day (see this table)
• Negotiating a Time to Pay arrangement with HMRC (and keeping to it), will mean lower, or no, late payment penalties
• To give businesses time to adapt to the new system, HMRC will not be charging a first late payment penalty until after 31 December 2023

At a high level the new late payment interest system works as follows:

• It applies to VAT accounting periods starting on or after 1 January 2023
• If you pay VAT-related amounts late, late payment interest will be due on the amount outstanding, from the first day your payment is overdue to the day you pay it in full
• It applies to payments due in relation to
  • the VAT Return
  • amendment to or correction of a VAT return
  • VAT assessment issued by HMRC
  • AND payments on account
• Interest is calculated at the Bank of England base rate plus 2.5%.

At a high level the new Repayment interest system works as follows:

• Repayment interest is paid at the Bank of England base rate minus 1%, with a minimum rate of 0.5%
• It will not be paid if you have any outstanding VAT returns
• If you’ve already paid the VAT to HMRC, Repayment interest is calculated from the day after the later of these two dates:
  • when you paid the VAT to HMRC
  • the deadline for your accounting period
• If you’ve not paid the VAT to HMRC Repayment interest starts on the day after the later of these two dates:
  • the deadline for your accounting period
  • when you submitted the VAT return or claim
• For traders making payments on account, if the instalments paid result in paid than owed for a VAT accounting period, repayment interest on the overpaid amount starts from the date the VAT return was due.