For VAT periods starting on 1 January 2023, HMRC are changing the way that VAT penalties & interest are charged on late payment and late submission of VAT returns.
This could potentially have a big impact on your business.
HMRC are scrapping the current surcharge penalty regime in favour of a new system that will also punish those with refunds/nil liabilities for late submission, whilst also introducing late payment interest charges which they have historically not done.
Late Payment Interest Charges
Ongoing, any payment that is made after the due date of the VAT return (1 month & 7 days after the period end date) there will be interest charged on a pro rata basis until the date the return is paid in full. The interest rate is base rate + 2.5% per annum, at the time of this article this would be 6.75% per annum.
Payment Arrangements with HMRC
If you enter into a time to pay arrangement with HMRC then interest will only be charged on the outstanding balance each day rather than the full balance if no arrangement were made.
Interest on Late Payments
There will also now be an interest charge on late payment of penalties, as well as on error notifications & HMRC assessments (both of these have historically never had interest charged).
Interest for late payment of penalties will be charged from the day after the due date (usually 30 days after the issue of the penalty). The rules for assessments and error corrections have not changed, the interest would be charged from the due date of the return the correction related to until payment date.
Please note that for those that pay by direct debit, you will not be charged interest despite the payment not clearing your bank until around the 10th.
On the plus side..
On a more positive note, HMRC will also pay you interest if they make VAT refunds late or if you have overpaid at a rate of base rate -1% (not quite as much as they charge!)
Late Payment Penalties
HMRC have replaced the surcharge regime with a new penalty system.
Previously many companies were given a ‘grace’ period, whereby the first late payment did not result in a surcharge but rather they entered a surcharge period and would be charged if another return was late in the following 12 months then you would be charged.
This system no longer exists and you will be charged on the first late payment.
The New Penalty System
There are now 3 potential penalties for late payment of a VAT return.
These are as follows:
- 2% after 15 days
- 2% after 30 days
- 4% pro rata from day 31 until payment is made
For 2023 HMRC are applying a ‘light touch’ and provided that payment is made before 30 days after the due date there will not be a penalty.
From 2024 you will need to pay before the 15th day to avoid any penalty.
Penalties can also be avoided if you have contacted HMRC to arrange a time to pay before the 15th or 30th day.
Please be aware that interest will still be charged from the day after the due date until payment.
Previously there was no punishment for late submission of a VAT return the penalty was always based on late payments, this has now changed and there is a points system for late submissions.
How does the points system work?
Each late submission will now generate a ‘penalty point’, these remain on the account for a period of time depending on the return frequencies.
These penalties points will also accumulate to a level where a penalty is charged, again this depends on the frequencies of the returns.
How long will my penalty point last?
- Under quarterly returns, you must submit your returns on time for 12 months before the penalty points are reset to zero
- Under monthly returns, you must submit your returns on time for 6 months before the penalty points are reset to zero
- Under annual returns, you must submit your returns on time for 24 months before the penalty points are reset to zero
Under all of these cases, if there is an outstanding return up to 2 years old that has not been submitted then your penalty points will not be reset.
When will I be charged a penalty?
- Under quarterly returns, a penalty will occur on your 4th penalty point
- Under monthly returns, a penalty will occur on your 5th penalty point
- Under annual returns, a penalty will occur on your 2nd penalty point
The penalty charge once reaching your relevant point will be £200 per subsequent late submission.
Avoiding VAT Penalties & Interest
Operating a business can be challenging at the best of times.
However administration and in particular the book-keeping and VAT can be the achilles heel for many business owners.
Getting your affairs in order and understanding your obligations is essential otherwise you will be penalised.
Book-keeping & VAT Assistance
If you need help with your book-keeping and VAT please contact us.
We can provide you with bespoke VAT and book-keeping training or alternatively we can provide you with an outsourced solution to take the stresses of book-keeping and VAT away from you to help you to avoid any VAT penalties & interest charges.
If you would like to find out more, please contact Luke Anderson or call us on 01634 731 390.
If you would like to find out more about some of our services that might help you please take a look at our related pages:
Accounting & Compliance
Building a Business
Blogs related to VAT
Take a look at our other blogs around VAT
Do you need a VAT health check?
Five interesting VAT rules you may not know
The content in this blog is correct as at 11th April 2023 See terms and conditions.