New penalties for submitting VAT returns or paying VAT late came into effect on January 1 2023, and in the last month, we have started to see HMRC issue penalty correspondence.
To avoid penalties, you must submit your VAT returns on time using software that is compatible with Making Tax Digital (unless you are exempt from Making Tax Digital.
What happens if you submit a VAT return late?
For VAT periods starting on or after 1 January 2023, penalties for submitting VAT returns late work on a points-based system. One penalty point is given for each VAT return submitted late.
If you reach your points threshold, you will have to pay a fixed £200 penalty.
You will also have to pay another £200 penalty each time you submit your VAT return late while you are at the threshold. Your points threshold will depend on how often you need to submit a VAT return.
If your VAT accounting period is annual, the penalty point threshold is 2. If your VAT accounting period is quarterly, the penalty point threshold is 4. If your VAT accounting period is monthly, the penalty point threshold is 5.
Penalty points expire automatically or are removed differently depending on whether or not you have reached the threshold in your accounting period.
What happens if you do not pay your VAT on time?
If your payment is more than 15 days overdue, you will have to pay a first late payment penalty. If your payment is more than 30 days overdue, you will also have to pay a second late payment penalty.
You will also be charged late payment interest from the day after your VAT payment is due, to the day you pay in full. Interest will be calculated at the Bank of England base rate plus 2.5 per cent.
There is a soft landing period for the first year to help taxpayers get used to the new penalty system year, so HMRC won’t charge a first late payment penalty on VAT payments due on or before December 31 2023, providing you either pay full within 30 days of your payment due date or ask HMRC for a payment plan within that period and this is agreed.
