If you’re a VAT-registered business, you need to be aware of the upcoming changes to VAT late payment penalties. Starting next year, HMRC will bring in a new penalty and interest regime for late filing and late payment of VAT. It represents a dramatic change in the rules, especially compared to the default surcharge regime at present.

We can’t stress enough the importance of our clients providing information to us in a timely manner. The changes mean that, by sending us the correct information ahead of time, you’ll help avoid the risk of fines and penalty points.


The new rules will come into effect on 1 January 2023

The changes will affect everyone submitting VAT Returns for accounting periods starting on or after 1 January 2023. Any nil or repayment VAT returns received late will also be subject to late submission penalty points and financial penalties.


Late submission penalties will work on a points-based system

Under the new regime, for each VAT Return you submit late you’ll receive one late submission penalty point. Once a penalty threshold is reached, you’ll receive a £200 penalty plus a further £200 penalty for each subsequent late submission.

The penalty threshold will vary according to your submission frequency:

  • Annual submissions will have a threshold of 2 penalty points. The period of compliance will be 24 months.
  • Quarterly submissions will have a threshold of 4 penalty points. The period of compliance will be 12 months.
  • Monthly submissions will have a threshold of 5 penalty points. The period of compliance will be 6 months.

You’ll be able to reset your points back to zero if you submit your returns on or before the due date for your period of compliance, which 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.


Any late payments exceeding 15 days will be penalised

Under the new system, there are two separate types of late-payment penalties, referred to as the first penalty and the second penalty.

The first penalty has two separate legs:

  1. 2% of the unpaid VAT at Day 15
  2. A further 2% of the unpaid VAT on Day 30

If no payment is made until after Day 30, this means the total penalty will be 4% of the amount due. If the full payment is made between Day 15 to 30, the total penalty will be set at 2% of the amount due.

The second penalty only comes into effect from Day 31. From this point it operates rather differently and is charged daily, based on an annual rate of 4% of any outstanding amount.

Remember: the biggest change under the new regime is that no late payment penalty will arise if all outstanding VAT is paid within 15 days of the due date. This also applies to any Time to Pay arrangement being requested within that same period.


Late payment interest will still apply – but with some changes

The way interest is applied to late payments and repayments of VAT is also changing to be more in line with other taxes.

From 1 January 2023, late payment interest will be charged from the day a VAT payment becomes overdue until the date it’s paid in full. The rate applied will be the Bank of England base rate plus 2.5%.

Alongside this, the repayment supplement will be withdrawn for accounting periods beginning on or after 1 January 2023. It will be replaced by repayment interest which will accrue from the day after the due date or submission date – whichever is later – until HMRC makes the full repayment. This rate for repayment interest will be much lower than that for late payment interest. It will be set at the Bank of England base rate  minus 1% (subject to a minimum rate of 0.5%).


You’ll still have access to Time to Pay arrangements

The acknowledgement of Time to Pay (TTP) arrangements is a welcome feature of the new regime. These are effectively treated in the same way as payment when it comes to stopping the penalty clock. Provided your TTP application is approved, the date on which you first request it is treated as the date of payment.

E.g. If the TTP arrangement is requested from HMRC on Day 14, no penalty will arise regardless of how long it takes for HMRC to approve the TTP application.

However, if the TTP agreement is then broken by the taxpayer, the first and second late payment penalties will be charged as if the TTP had never had effect. This means missing a single scheduled payment under the TTP may cause full penalties to be charged – even if all previous instalment payments under the TTP agreement have been made on time.

Outside of TTP, if you have a genuine reason for not paying on time, the usual provisions around reasonable excuse will still apply. You will still be able to request a review by HMRC or submit an appeal to the tribunal in respect of any late payment penalty charges.


HMRC will grant a period of familiarisation throughout 2023

During 2023, as the new late payments penalties are introduced, HMRC will allow a grace period while you adjust to the new regime. From 1 January 2023 until 31 December 2023, penalties won’t be charged during the first leg of the penalty (the 2% at Day 15). Accordingly, as long as you pay within 30 days of the due date, no late payment penalty will arise during the first year (but late payment interest will still be charged).

If you’re having cash flow difficulties this will be welcome news. However, we recommend getting into the habit of filing on time now so you’re prepared for 2024 and beyond. It’s best practice to approach all payments as if the grace period doesn’t apply, meaning you don’t have to then implement changes when the period of familiarisation ends. Additionally, being mindful of paying on time will only benefit your business as interest rates climb.


Be as prepared as possible for the incoming changes

With all these changes being introduced in January, it might be hard to adjust. We know VAT filing can easily slip to the bottom of your to-do list while you’re juggling the running of your business, but staying on top of it will save you paying avoidable penalties when the new rules are introduced.

All of this can be overwhelming – but we’re here to help. Get in touch with us if you’d like support or more information to prepare for these changes.