I do my own VAT return and was late submitting my last one. I’ve heard a new VAT penalty system applies, can you confirm if this is now in place and will I have a penalty?
HMRC has issued some initial guidance on the new regime and promises more detailed guidance sometime in December 2022.
The changes will affect VAT Returns for accounting periods starting on or after 1st January 2023. HMRC will also introduce a period of familiarisation and will not be charging a first late payment penalty for the first year from 1st January 2023 until 31st December 2023, if you pay in full within 30 days of your payment due date.
What are the current VAT rules?
VAT-registered businesses are required to submit their VAT returns and ensure payment of VAT due has cleared to HMRC’s bank account on time.
HMRC considers you to be in ‘default’ if you have not received your VAT Return by the due date. This applies even if your return is ‘nil’ or shows a repayment is due from HMRC. You will also be considered to be in default if full payment for the VAT shown as due on your return, has not cleared to the HMRC account.
On the first default, HMRC will send you a Surcharge Liability Notice. The notice will warn you that if you default in respect of an accounting period ending within a specified period, you may have to pay a surcharge to HMRC.
If you subsequently default during a surcharge period, and there’s VAT outstanding for the tax period in default, HMRC will charge you a default surcharge. HMRC will also send a Surcharge Liability Notice Extension, which will extend the surcharge period together with a surcharge assessment if a surcharge is due. HMRC can levy a surcharge of up to 15% for repeat offenders.
As the VAT system is complicated, a special relaxation applies to the smaller businesses. If your VAT taxable turnover is £150,000 or less, HMRC will send you a letter offering support, rather than issuing a Surcharge Liability Notice on a first default. However, if you default again within the following 12 months HMRC will then issue you with a Surcharge Liability Notice.
You can find out more details on the default surcharge here.
How will the new VAT penalty system affect late VAT returns in the future?
In contrast to the previous treatment, late submission penalties will work on a new points-based system.
For each late VAT return, you will receive one late submission penalty point.
Once a penalty threshold is reached, HMRC will issue a £200 penalty and a further £200 penalty for each subsequent late submission.
The late submission penalty points threshold will vary according to your VAT return submission frequency:
Submission frequency Penalty points threshold
Annual VAT returns 2
Quarterly VAT returns 4
Monthly VAT returns 5
HMRC will reset your points back to zero if your VAT returns are filed on time for what they call your ‘period of compliance’, and this will be based on your submission frequency. You must also make sure all outstanding returns due for the previous 24 months have been received by HMRC.
Submission frequency Penalty points threshold
Annual VAT returns 24 months
Quarterly VAT returns 12 months
Monthly VAT returns 6 months
For example, if your VAT return is filed on a quarterly basis and the following returns are late:
March 2024 quarterly VAT return
June 2024 quarterly VAT return
September 2024 quarterly VAT return
HMRC would apply 3 points for the above 3 late VAT returns.
If the business accrued a further late filing point within the 12-month compliance period, HMRC would issue a £200 late filing penalty.
The system is designed to make the penalty regime fairer by punishing frequent late filers and being more lenient for businesses that are occasionally late.
As well as new rules for returns, HMRC also plans penalty charges for late payment and interest charges.
When will I receive VAT penalties?
HMRC has wide powers to impose penalties on businesses that incorrectly apply the VAT rules. Penalties can apply in the following situations:
Late VAT returns
Late VAT payments
Late VAT registration
VAT errors
At Maz & Co. Accountants, we are experts in VAT compliance and advice. Allowing us to take care of your VAT affairs, not only gives you peace of mind, but should also avoid you from wasting your hard-earned cash on penalties and interest.
If you would like to discuss your tax affairs further please contact us at 020 8554 2020
or use our simple online contact form to arrange a free initial consultation.