HMRC has announced a new penalty regime to replace the default surcharge regime for VAT periods starting on or after 1 January 2023. The new regime will affect UK VAT registered businesses that submit late UK VAT returns or make late VAT payments in the UK.
There will also be changes to how VAT interest is calculated.
Current UK late VAT return and late VAT payment rules
If a taxpayer misses the deadline for submitting a late return or pays late, HMRC records a ‘default’ on their account.
Once taxpayers have defaulted, they will begin a 12 month ‘surcharge period’. A surcharge is an extra amount on top of the VAT they owe.
A surcharge payment doesn’t apply:
- For this first error and
- in case a taxpayer submits a late return but they:
- have no VAT to pay
- pay their VAT in full by the deadline, or
- are due a VAT repayment
If the taxpayer defaults again within 12 months, the surcharge period will be extended for another 12 months.
The table shows how much taxpayers will be charged if they default within a surcharge period.
| 1st | Surcharge if annual turnover is less than £150,000 | Surcharge if annual turnover is £150,000 or more |
| 2nd | No surcharge | 2% (no surcharge if this is less than £400) |
| 3rd | 2% (no surcharge if this is less than £400) | 5% (no surcharge if this is less than £400) |
| 4th | 5% (no surcharge if this is less than £400) | 10% or £30 (whichever is more) |
| 5th | 10% or £30 (whichever is more) | 15% or £30 (whichever is more) |
| 6th | 15% or £30 (whichever is more) | 15% or £30 (whichever is more) |
HMRC can charge the taxpayer a penalty of up to:
- 100% of any tax understated or over-claimed if they send an inaccurate return
- 30% of an assessment if HMRC sends an incorrectly low assessment and the taxpayer doesn’t inform HMRC within 30 days
- £400 if the taxpayer submits a paper VAT Return (only certain people are allowed to submit a paper VAT Return)
HMRC can charge late payment interest at 4.25% if a taxpayer doesn’t report and pay the correct amount of VAT.
New penalty rules
From 1 January 2023, there will be separate penalties charged for late submission of the VAT return and late payment of VAT.
Late submission
Late submission penalties will work on a points-based system.
For each VAT Return a taxpayer submits late, they will receive one late submission penalty point.
Once a penalty threshold is reached, taxpayers will receive a £200 penalty and a further £200 penalty for each subsequent late submission.
The late submission penalty points threshold will vary according to the submission frequency as follows:
| Submission frequency | Penalty points threshold | Period of compliance |
| Annually | 2 | 24 months |
| Quarterly | 4 | 12 months |
| Monthly | 5 | 6 months |
Late payment
There will be two stages of penalties.
First Stage
- Up to 15 days overdue
The taxpayers won’t be charged a penalty if they pay the VAT they owe in full or agree a payment plan on or between days 1 and 15
- Between 16 and 30 days overdue
The taxpayers will receive an initial penalty calculated at 2% on the VAT they owe at day 15 if they pay in full or agree a payment plan on or between days 16 and 30
Second Stage
If any of the VAT is still unpaid after 30 days, the penalty increases to 4% of the VAT outstanding.
In addition to the above, if VAT remains unpaid on day 31, the taxpayer will receive 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 a payment plan is agreed.
Late payment interest
HMRC will charge late payment interest from the day payment is overdue to the day payment is made in full, calculated at the Bank of England base rate plus 2.5%.
Additional information
HMRC states in the guidance that:
- A period of familiarisation will begin from 1 January 2023 until 31 December 2023 where HMRC won’t charge a first late payment penalty if the taxpayer pays in full within 30 days of their payment due date
- More detailed information about the changes to VAT late submission penalties, late payment penalties and VAT interest charges will be published in December 2022. Therefore, it’s important to monitor any HMRC updates to be aware of the potential risks a business in the UK might incur in case of errors.
Take Action
Have questions about the upcoming changes to UK VAT penalties for late payment and filing? Speak to one of our tax experts.
