A change to the VAT penalties regime for late submission and payment, from 1 January 2023

From the beginning of 2023, there will be a new penalty regime introduced by HMRC in respect of late submission of VAT returns and late payment of VAT liabilities. This will replace the default surcharge regime which has been in place for a number of years.

Late submissions can incur financial penalties, and late payment will incur late payment interest from the day your payment is overdue until the day it is settled in full.

Soft landing period:

As with other schemes introduced in recent years by HMRC, they are aware that it will take time for businesses to get used to these changes, so no late payment penalty will be charged for the 2023 calendar year, as long as VAT liabilities are paid in full within 30 days of the payment due date.

How can I avoid these penalties?

The first answer to this question is to be up to date with your record-keeping. Whether you are doing this internally or if Charterhouse are providing this service for you, it is crucial for so many reasons to stay on top of this.

In respect of payments, it is our very strong recommendation that all businesses activate a Direct Debit link between their bank and HMRC, so that liabilities are collected automatically on the payment due date.

This takes out any human intervention in the payment process and this can be set up from within your HMRC Business Tax Account, if you have one.

My returns are always showing refunds, so this won’t affect me, right?

Wrong. Under the new rules, even nil returns and returns showing a repayment due are subject to late submission penalty points and financial penalties.

How does it work?

For late submissions, there is going to be a points-based system.

For each VAT return that is submitted late the offending business will receive 1 penalty point.

There are going to be various thresholds based on how frequently you are required to submit VAT returns, and once those thresholds are reached, financial penalties will be applied. The penalty is £200 for reaching a threshold, and then a further £200 for each subsequent late submission.

Submission frequency

Penalty points threshold

Period of compliance

Annually 2 24 months
Quarterly 4 12 months
Monthly 5 6 months

You will 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 — this will be based on your submission frequency
  • make sure all outstanding returns due for the previous 24 months have been received by HMRC

For late payments, the earlier you get caught up, the lower the penalty will be.

Up to 15 days overdue

No penalty if the VAT owed is paid in full, or a payment plan is agreed on or between days 1 and 15

Between 16 and 30 days overdue

A first penalty of 2% on the VAT owed at day 15, if you pay in full or agree a payment plan on or between days 16 and 30

31 days or more overdue

A first penalty of 2% on the VAT owed at day 15 plus 2% on the VAT owed at day 30.

A second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated when the outstanding balance is paid in full or when a payment plan is agreed

The interest rate is calculated as the Bank of England base rate, plus 2.5%.

Is there any good news?

If you are in the position of being due a VAT repayment, HMRC will calculate repayment interest on any amounts owed to you. This replaces the repayment supplement from 1 January 2023.

It will be calculated from the day after the due date or the date of submission (whichever is later) and until HMRC pays the repayment VAT amount due to you in full.

The repayment interest rate is the Bank of England base rate minus 1%, with the minimum rate being 0.5%.

That’s a lot take in…

It is, and HMRC will issue further guidance in December 2022, so Charterhouse will keep you informed of any additional developments.

To find out how this will affect your business contacts us and speak to one of our Advisors.

020 8863 4566