New VAT penalties and Interest

We would like to remind you that new penalties apply if you’re late filing a VAT return or paying your VAT bill. How the interest applies to late VAT payments and late repayments has also changed.

Late filing

The new late filing penalties is a points based system, with taxpayers receiving a point for each VAT return they files late. If the taxpayer reaches a certain number of points, a fixed £200 penalty is charged.

Taxpayers will have a different threshold depending on how often they file their VAT returns – four points for quarterly, five for monthly and two for annually.

Once the threshold is met, each and every additional late VAT return will trigger a further £200 penalty and these points will only expire after a ‘period of compliance’. However, if the taxpayer remains below their threshold for 24 months, their points will automatically expire.

In general, the period of compliance mandates that all returns for a specific time period (for example, 12 months for quarterly VAT returns) be filed on time and that all unfiled VAT returns for the previous 24 months be submitted. The good news is that the taxpayer’s points total will be reset to zero once both of these requirements have been satisfied.

In contrast to default surcharge, under the new system, the amount of any late filing penalty has nothing to do with the VAT owed on the return.

Late Payment

The new late payment fines are intended to encourage taxpayers who are having financial difficulties to contact HMRC as soon as possible. Depending on how late the payment is, there will be two different penalties:

• a first penalty of 2% of the VAT owed at day 15 and a second penalty of 2% of the VAT owed at day 30.
• a second penalty beginning on day 31, charged daily at a rate of 4% of the outstanding amount.

A Time to Pay (TTP) agreement with HMRC is treated as payment for the purposes of both penalties, with the penalty clock being “stopped” on the date of the initial TTP application. The terms of that TTP will be handled as if they never existed, and full penalties will be charged if the agreement is subsequently broken.

Interest

VAT late payment interest will be imposed at the Bank of England base rate plus 2.5%, bringing it into line with other taxes.

For VAT periods starting on or after January 1, 2023, the current payback supplement will be withdrawn. Instead, HMRC will have to pay a significantly less favorable repayment interest rate of 1% less than the Bank of England base rate (with a minimum of 0.5%).