HMRC have announced a change to the penalties for submitting or paying a VAT return late. This will take effect from the first VAT period after 1 January 2023. Importantly these changes will also be applied to nil or repayment VAT returns which are not submitted on time.
What are the changes?
Penalty points will replace the current surcharge. One penalty point will be given for each late submission up to a threshold which varies according to whether you submit monthly, quarterly or annual VAT returns. Once you reach the threshold the penalty will be £200 plus £200 for each subsequent late submission.
What are the thresholds?
Monthly VAT returns - 5 late submissions or late payments
Quarterly VAT returns - 4 late submissions or late payments
Annual VAT returns - 2 late submissions or late payments
Your penalty points will revert back to zero once you have submitted your returns on or before the due date for your period of compliance which is 6 months for monthly returns, 12 months for quarterly returns and 24 months for annual returns and submitted all previously outstanding returns.
Late Payment Penalties
If you pay your VAT between day 1 and day 15 or agree a payment plan you will not receive a penalty.
The penalty will be 2% of the VAT due and will be payable on day 15.
An additional 2% of the VAT due will be payable on day 30.
After this the penalty will be calculated daily at 4% per annum.
Late Payment Interest
This will be calculated at the Bank of England base rate plus 2.5%.
Late Repayment Interest
HMRC will pay interest on refunds of VAT based on the latest of the due date or date of submission until the repayment date. The rate will be the Bank of England base rate minus 1%, with a minimum rate of 0.5%.
Whilst the new penalties and interest charges take effect from the first VAT return after 1 January 2023, the first late payment penalty will not be charged during the year to 31 December 2023 as long as the VAT return is submitted and payment is made within 30 days of the payment due date.
Businesses sometimes struggle to pay VAT and if this is the case it is important to make a Time to Pay arrangement with HMRC to avoid these additional costs.
Remember the VAT you collect from your customers is not your income and should not be considered to be part of your cash flow. The VAT element of every sale, when paid, should be transferred to a separate bank account so that the money is available to you when your VAT bill is due. If you reclaim VAT on purchases, which most businesses do, you will be building a small savings pot at the same time which will be of benefit at a later date.