The Government announced pre-pandemic that it intended to change the way interest and penalties are applied for VAT purposes.
After a number of delays, the new rules are to be implemented 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. There will also be changes to how VAT interest is calculated.
Who is affected?
The changes will affect everyone submitting VAT returns for accounting periods commencing on or after 1 January 2023. Any nil or repayment VAT returns received late will also be subject to late submission penalty points and financial penalties.
VAT returns submitted late
Late submission penalties will work on a points-based system. For each VAT return submitted late, one late submission penalty point will be imposed. Once a penalty threshold is reached, a £200 penalty will apply, with a further £200 penalty for each subsequent late submission.
The late submission penalty points threshold will vary according to the submission frequency of the return.
| Submission frequency | Penalty points threshold | Period of compliance |
| Annually | 2 | 24 months |
| Quarterly | 4 | 12 months |
| Monthly | 5 | 6 months |
It will be possible to reset the points back to zero if subsequent returns for the period of compliance are submitted on or before the relevant dates. It will be worth ensuring that all outstanding returns due for the previous 24 months have been received by HMRC.
Late payment of VAT
Penalties for the late payment of VAT will also change. The rate of penalty depends on how late the payment is:
- Up to 15 days overdue – there will be no penalty provided that the outstanding VAT is paid in full or a payment plan is agreed with HMRC before day 16.
- Between 16 and 30 days overdue – there will be a penalty of 2% on the VAT owed at day 15 if this is paid in full or a payment plan is agreed with HMRC between days 16 and 30.
- 31 days overdue – there will be a penalty of 2% on the VAT owed at day 15 plus 2% on the VAT owed at day 30 if the VAT is paid in full or a payment plan is agreed with HMRC on or after day 31.
- More than 31 days overdue – there will be a penalty calculated at 2% on the VAT owed at day 15 plus 2% on the VAT owed at day 30.
- There will then be a second penalty 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.
However, to give businesses time to get used to the changes, HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the VAT is paid in full within 30 days of the payment due date.
How late payment interest will be charged
From 1 January 2023, HMRC will charge late payment interest from the day the payment is overdue to the day the payment is made in full. Late payment interest is calculated as the Bank of England base rate plus 2.5%.
Introduction of repayment interest
The repayment supplement will be withdrawn from 1 January 2023. For accounting periods starting on or after 1 January 2023, HMRC will pay repayment interest on any VAT owed. This 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. Repayment interest will be calculated as the Bank of England base rate minus 1%. The minimum rate of repayment interest will always be 0.5%.
For further information HMRC have produced an easy guide at https://www.gov.uk/guidance/prepare-for-upcoming-changes-to-vat-penalties-and-vat-interest-charges
If you would like to discuss any of the above please do get in touch.
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