For those that aren’t already aware, the system for levying penalties on late VAT returns and late payments is changing in 2023.

The much maligned Default Surcharge system is being replaced with a more complex but arguably much fairer system for penalising late return submissions, and late payments of VAT due.

The new system will come in to play for VAT returns starting on or after 1st January 2023. For lots of businesses this will be VAT period 03/23, unless you file monthly in which case it will apply to your January return. We haven’t quite escaped the old system yet as Default Surcharge will still apply to any VAT period starting prior to 1st January e.g. periods 01/23 or 02/23 if filing quarterly.

But broadly speaking this is the new approach to be adopted by HMRC;

Late Filing Penalties – a points based system where you rack up penalty points for each late filing of a VAT return (think driving license points for offences!). Once you hit a specific number of points relative to your periodic filing, a fine will be levied.

Late Payment Penalties – a tiered system designed to be more punitive the later you are paying your dues. If you pay or agree a payment plan within 15 days, no penalty will be applied. If you pay or agree a payment plan after 15 days but before 30 days, a 2% penalty applies based on tax owing at day 15. If you pay later than the 30 day period, another 2% penalty applies to the tax owing at day 30, plus a further daily penalty equal to 4% per year for the duration of the balance owing.

Late Interest – From 1st January 2023 interest will be charged from the date of tax due to full payment to HMRC, set at 2.5% above Bank of England base rate.

Repayment Interest – HMRC are introducing repayment interest which will be paid on amounts owing to businesses that file repayment VAT returns albeit it at 1% below the Bank of England base rate.

Full details can be found here.

What’s GOOD?

• No more Default Surcharge which was draconian in its application
• Proportionate penalties for late payments, and in some cases no penalty at all
• HMRC will adopt a soft landing period for one year whereby NO penalty will apply to late payments if paid in full within the 30 days

What’s BAD? 

• A business that files ‘nil’ or repayment VAT returns will also be impacted by the late filing penalties, so tardy filers now have a reason to get returns submitted on time.

And the UGLY?

• Hidden in these changes is the scrapping of Repayment Supplement, a self-imposed fine when HMRC take too long to authorise a VAT repayment. This was a valuable tool in keeping HMRC on their toes and processing claims without undue delay.