Knowledge Centre

On 1 January 2023 HMRC introduced a new penalty system for all VAT return periods starting on or after 1 January 2023.

Late submission penalties

These work on a points-based system. For each VAT return submitted late (including nil and repayment returns), the VAT registered business will receive a penalty point until they reach the penalty point threshold – at which stage they will receive a £200 penalty. A further £200 penalty will also apply for each subsequent late submission while at the threshold. The penalty point thresholds are based on how often you file VAT returns:

• If you file Monthly VAT returns then your penalty point threshold will be 5

• If you file Quarterly VAT returns then your penalty point threshold will be 4

• If you file annual VAT returns then your penalty point threshold will be 2

Penalty example for a business making quarterly returns

A company submits their VAT Return quarterly. This means their penalty point threshold is 4.

They already have 3 penalty points because they submitted 3 previous returns late.

They submit their next return late and get a fourth penalty point. Because they’ve reached the penalty point threshold, they receive a £200 penalty.

The company submits their next return on time. They stay at the threshold of 4 penalty points but do not get a £200 penalty.

The company submits their next return late. As they’re still at the penalty point threshold of 4 points, they receive another £200 penalty.

The late submission penalty rules do not apply to your:

• first VAT return if you’re newly VAT registered

• final VAT return after you cancel your VAT registration

Removing penalty points

If you have not reached the penalty points threshold i.e. you file quarter VAT returns and you have 2 penalty points (the threshold being 4 penalty points). Each of the 2 points will expire two years after you received them.

If you have reached the penalty points threshold then you can only remove the penalty points by meeting both conditions A and B.

• A: complete a period of compliance, submitting all returns by the deadline.

• B: submit all outstanding returns for the previous 24 months.

A period of compliance simply means submitting a number of VAT returns on time. For a business filing quarterly this would be the next 4 VAT returns.

Late payment penalties

If a VAT payment is more than 15 days overdue, businesses will pay a first late payment penalty. If the VAT payment is more than 30 days overdue, the first late payment penalty increases and a second late payment penalty will also apply. To help businesses get used to the changes HMRC will not charge a first late payment penalty on VAT payments due on or before 31 December 2023, if businesses either pay in full or a payment plan is agreed within 30 days of the payment due date.

Payment up to 15 days overdue

First late payment penalty = no penalties due.

Second late payment penalty = no penalties due.

Payment between 16 and 30 days overdue

First late payment penalty = 2% of the VAT you owe at day 15.

Second late payment penalty = none

Payment 31 days or more overdue -

First late payment penalty = 2% of what was outstanding at day 15 plus 2% of what is still outstanding at day 30

Second late payment penalty = 4% per year of the outstanding balance charged everyday from day 31 until the outstanding balance is paid in full

Payment plans - HMRC will help businesses that cannot pay their VAT bill in full. Customers may be able to set up a payment plan to pay their bill in instalments. After 31 December 2023, if a customer proposes a payment plan within 15 days of payment being due and HMRC agrees it, they would not be charged a late payment penalty, provided that they keep to the conditions of the payment plan. Late payment penalties can apply where proposals are made after the first 15 days, but the agreement of the payment plan can prevent them increasing.