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New VAT Penalty Regime in the UK from 1st January 2023

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Date14 Dec 2022
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From 1st January 2023, the way the UK’s tax authorities (HMRC – Her Majesty’s Revenue and Customs) charge penalties for late submission of VAT returns or payment of the resulting tax will change.

In essence, the system is intended to be more lenient for those businesses that normally file and pay for their VAT returns on time, and will penalise more severely those that notoriously file the returns late (even if these are only nil returns).

Penalties under the new rules will accrue from Q1 2023 onwards, meaning that any penalties imposed earlier, as well as penalties that may still accrue for Q4 2022, will be settled under the current rules.

Penalties for late filing of VAT returns will operate on a points-based system, meaning that for each VAT return filed after the due date, a company will receive one penalty point for being late.
Once the penalty threshold is reached, the business will receive a penalty of £200 and a further £200 for each subsequent late filing.
The level of this threshold depends on the frequency with which the business submits its VAT returns, e.g. monthly, quarterly or annually.

Frequency of submitting VAT declarations Point threshold Point counting period
Annually 2 24 months
Quarterly 4 12 months
Monthly 5 6 months

The points may be reduced to zero provided that the company submits all returns on or before the due date in the relevant accounting period and provided that the company has submitted all outstanding returns due in the previous 2 years.

Late payment penalties will increase the longer a payment remains outstanding. The scale of late payment penalties is as follows:

  • Up to 15 days after the due date – no penalty if between 1 and 15 days VAT is paid in full or a repayment plan is agreed with HMRC.
  • Between 16 and 30 days late – a penalty of 2% on the VAT due on day 15 will be charged if between day 16 and 30 VAT is paid in full or a repayment plan is agreed with HMRC.
  • More than 31 days past due – a penalty of 2% on the VAT due on day 15, plus 2% on the VAT due on day 30 will be charged if the VAT is not paid.

A second penalty, calculated at a daily rate of 4% per annum, will also be applied, as long as the arrears exist. It will be charged once the outstanding VAT has been paid in full or a repayment plan has been agreed with HMRC.

Late payment interest will also be accrued from the first day of the overdue payment until it is paid in full.

Please find the link to the HMRC guidance below:
Prepare for upcoming changes to VAT penalties and VAT interest charges


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