Introducing HMRC’s new VAT penalties

April 26th 2022

The first step towards alignment of VAT and direct tax penalties was due to take place in just two months but the government recently announced a delay. What’s the full story? Audrey Rankine takes a closer look.

HMRC’s original timetable for the harmonisation of its late filing penalty and late payment interest regimes across most direct and indirect taxes was due to start on 1 April 2022 with the scrapping of the VAT surcharge rules. But following the announcement by the Treasury, this has been put back by nine months until 1 January 2023.

When the new rules take effect late filing penalties will be charged using a points system. Points will be added to a taxpayer’s record for each late filing and penalties will escalate the more points are racked up. For late payments there will be varying charges according to how late each payment is.

Here is an overview of the new system along with a summary of the late submission penalties and late payment penalties.

The new penalties will replace the default surcharge with late submission and late payment penalties.

The changes take effect for VAT customers from 1 January 2023.

The new penalties are designed to be fairer and more effective.

• The new points-based system for late submissions is designed to be more lenient.
• The late payment penalties will be charged at different rates based on when the payment is received.

If a submission deadline is missed, you will receive a point for each late submission.

Once a penalty threshold has been met a fixed penalty of £200 will be issued, and another £200 for every subsequent late submission.

The new points-based penalties are the same across VAT and ITSA

Submission frequency     Penalty threshold
Quarterly                                  4 points
Monthly                                    5 points

• Points accrue separately, so if you file ITSA as well as VAT, points will build in separate pools.
• The threshold will vary according to the filing frequency.
• Once the threshold has been hit and a penalty charged, a further £200 will be charged for each missed submission.

Submission frequency    Period of compliance
Quarterly                                  12 months
Monthly                                    6 months

To reset all of your points to nil you must satisfy the following two conditions:-
• A period of compliance based on the submission frequency.
• All obligations that were due within the preceding 24 months have been received, there are no outstanding returns.

However if you are unable to meet both of the above conditions:-
• As long as you have not met the threshold, each individual point will automatically expire after 24 months.

Customers will be able to appeal both the points and penalty charges.

Late payment penalties are built around the idea that the sooner you pay, the lower the penalty rate will be.

If your payment is late but received within 15 days of the original payment deadline then there is no late payment penalty.
If your payment is made within the next 15 days the penalty is charged at 2% of the balance outstanding at day 15.
If your payment is made after day 30 the penalty will be charged at 2% of the balance due at day 15 + 2 % of the balance due at day 30 together with a secondary penalty being a daily charge of 4% on APR for the duration of the outstanding balance.

Agreeing a payment plan with HMRC may result in the penalty charges being suspended. HMRC will notify the customer of both penalties separately.

Taxpayers will be able to appeal the penalty charges.

Please note that interest will also be charged on any late payments from the original due date until the date paid. The interest will be charged at HMRC’s rate of interest applicable at that time.

To give customers time to get used to the changes, HMRC won’t be charging a late payment penalty for the first year from 1 January 2023 until 31 December 2023 if you pay in full within 30 days of the payment due date.

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