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HMRC Changes to Vat Penalties and Interest

Updated: Jun 24, 2023

Important Update: Changes in VAT Penalties and How They Impact VAT Registered Companies

I wanted to bring your attention to the new penalties that have been implemented for submitting VAT returns or paying VAT late, effective from 1 January 2023. These penalties have replaced the default surcharge and now extend to customers who submit nil or repayment returns.

To avoid these penalties, it is crucial that you:

  • Submit your VAT returns on time, utilizing software compatible with Making Tax Digital (unless exempt).

  • Ensure timely payment of your VAT obligations.

Interest and Penalties

Moreover, there have been alterations in the calculation of interest on late VAT payments and repayments, starting from VAT periods on or after 1 January 2023.

For VAT periods commencing on or after 1 January 2023, penalties for late VAT return submissions will follow a points-based system. Each late submission will accrue one penalty point.

Upon reaching your points threshold, a fixed penalty of £200 will be levied. Additionally, each subsequent late VAT return submission while at the threshold will incur an additional £200 penalty. Your specific points threshold will depend on your VAT return submission frequency.

Further information regarding how late submission penalties operate, the points threshold, and penalty removal after late submission can be found on GOV.UK.

If your VAT payment is more than 15 days overdue, a first late payment penalty will be applicable. Should the payment exceed 30 days overdue, a second late payment penalty will also be incurred.

Detailed guidance on how late payment penalty’s function and how to avoid them is available on GOV.UK.

Late payment interest will be charged from the day following your VAT payment due date until the day you settle the amount in full. The interest rate will be calculated at the Bank of England base rate plus 2.5%. For comprehensive information on late payment interest, including its calculation, please refer to GOV.UK.

How HMRC will support you to set up a payment plan for your VAT

Support in the First Year: To aid your adjustment to the new penalty system, no first late payment penalty will be imposed on VAT payments due on or before 31 December 2023 if you either:

  • Pay the outstanding amount in full within 30 days of the payment due date.

  • Request a payment plan within 30 days of the payment due date, which is subsequently approved by HMRC.

If your payment becomes 31 days or more overdue, both the first and second late payment penalties will be applicable.

HMRC are there to assist if you are unable to settle your VAT bill in full. You may be eligible to establish a payment plan for paying your bill in instalments.

From 31 December 2023 onwards, if you request a payment plan from HMRC within 15 days of the payment due date, and it is approved, no late payment penalties will be charged for periods commencing on or after 1 January 2023. However, it is crucial to adhere to the conditions of the payment plan.

Please note that late payment interest on overdue payments will still apply, even if you have an active payment plan in place. Failure to request a payment plan within 15 days or lack of approval will render you liable for late payment penalties.

Repayment supplement is being discontinued. If you are owed VAT and HMRC exceeds the repayment timeframe, you will be entitled to repayment interest. This interest will be calculated at the Bank of England base rate minus 1%, with a minimum rate of 0.5%. For eligibility criteria and information on how VAT repayment interest is calculated, please refer to the relevant resources.

And finally

Stay informed and ensure compliance with these updated VAT penalty regulations to avoid unnecessary financial consequences. For detailed guidance and resources, visit the GOV.UK website.

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