UK businesses prepare for new penalty regime in 2023

Penalties and late fees for VAT submissions and payments aren’t anything new. However, as of 1 January 2023, HMRC will introduce a new penalty regime, effectively changing how penalties are applied. Are you prepared for the upcoming changes? Here’s what you need to know to avoid unexpected penalties in the new year. 

What is the new VAT penalty regime?

The new VAT penalty regime is intentionally structured to encourage more taxpayers to file and pay on time. It will also separate late submission fees from late payment fees, providing a more structured system. 

The new system is widely considered a fairer approach, as it will penalise repeat late penalties more harshly than those who may miss an occasional deadline. However, it should be noted that it is slightly more complex than the current system and affects the filing process. 

The new penalty regime charge for late VAT returns

The new penalty scheme will follow a points-based system where VAT-registered businesses will receive a penalty point per late VAT return submission. Businesses are allowed a set number of penalty points. Once they reach their threshold (determined by the frequency of VAT returns), HMRC will start charging penalties. The penalty point thresholds are as follows; 

Annual VAT returns: Two points

Quarterly VAT returns: Four points

Monthly VAT returns: Five points

The new points-based system will impact anyone submitting a VAT return for accounting periods beginning or after 1 January 2023. 

If businesses meet the above-mentioned penalty-point limits, they will receive a £200 penalty. Furthermore, if there are additional late submissions, no further points will be added, but businesses will receive another £200 penalty per subsequent late submission. 

VAT-registered businesses will be allowed to reset their penalty point tally. However, this will only be permitted once HMRC has received any outstanding VAT returns for the previous 24 months. In addition, businesses must also have submitted on-time returns for 24 months (if submitting annual returns), 12 months (if submitting quarterly), or 6 months (if submitting VAT returns monthly). 

HMRC elaborated on the VAT penalty reform and stated that the intention is to improve the collection of outstanding VAT. The most significant change in the penalty system is that tiered penalties may encourage sooner payments, as the penalties will be lower. 

New penalties and interests for late VAT payments

Starting on periods on or after 1 January 2023, the new penalty regime will also include both interest and penalties for late VAT payments. Interest is charged at the base rate determined by the Bank of England, plus 2.5% from the day the payment is due until the payment date is in full. This will apply to all VAT-registered businesses in the UK, even where a business may have a Time To Pay (TTP) arrangement. 

Apart from the interest, no late payment penalty will be charged if the VAT is paid within 14 days of the due date. If the late payment exceeds 14 days, there will be a penalty charge of 2% of the VAT outstanding (on day 15). A further 2% will be added on day 30. If the late payment surpasses day 30, a daily penalty of 4% per annum will apply until the VAT is paid in full. 

Applying for a Time To Pay (TTP) arrangement

If a VAT-registered business applies for a TTP arrangement by day 15, it will have the effect of there being no late payment penalty charged. The interest, however, is still applicable. So in these circumstances, it’s only critical for businesses to apply by day 15 instead of receiving approval from HMRC by day 15. 

The suspension of a penalty where there is a TTP arrangement will only be viable if businesses adhere to the conditions of the TTP arrangement. These conditions are strict and not to be taken lightly. If a TTP arrangement is in place and businesses fail to make even one agreed-on payment, full penalties will be charged regardless of previous timely payments. 

Avoid penalties with experts by your side

Don’t get caught up in complications regarding the new VAT penalty regimes. Rest assured that all payments and submissions will be correctly filed and paid on time with help from our UK VAT specialists at VAT IT.