United Kingdom: New Penalty System to be Introduced in 2023

As of January 2023, new penalties will apply in cases of late submission of VAT returns or late payments of VAT liabilities.

The new penalties will replace the current default surcharges.

There will also be changes in how VAT interest is calculated.

Late repayment or NIL VAT returns will also be subject to penalties.

As per the HMRC guidance published on the topic, late submission penalties will work on a points-based system. For each VAT Return submitted late, the taxpayer would receive one late submission penalty point.

Once a penalty threshold has been reached, the taxpayer will receive a £200 penalty and a further £200 penalty for each subsequent late submission.

The late submission penalty point’s threshold will vary depending on the taxpayer’s submission frequency.

Below is a synopsis of the penalty points system:

Submission frequency Penalty points threshold Period of compliance
Annually 2 24 months
Quarterly 4 12 months
Monthly 5 6 months

There is a possibility for the taxpayers to reset their points back to zero if:

  • Their VAT returns are submitted on or before the due date for their period of compliance — this will be based on their submission frequency; and
  • Ensure all outstanding returns due for the previous 24 months have been received by HMRC.

If payment of VAT liability is not paid on time, there will be late payment penalties.

The sooner the taxpayer pays their liability, the lower the penalty rate will be where:

  • For late payments up to 15 days – taxpayers will not be charged a penalty if they pay within 15 days of the due date or agree on a payment plan on or between days 1 and 15;
  • For late payment between 16 and 30 days – taxpayers will receive their first penalty and this is calculated at 2% on the VAT owed on day 15 if they pay in full or agree on a payment plan on or between days 16 and 30; and
  • For late payments 31 days or more – taxpayers will receive a first penalty calculated at 2% on the VAT they owe on day 15 plus 2% on the VAT they owe on day 30.

Taxpayers 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 upon.

There will be a grace period where HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if the taxpayer pays in full within 30 days of your payment due date.

From 1 January 2023, HMRC will charge late payment interest from the day the VAT payment is overdue to the day it is made in full.

Late payment interest is calculated as the Bank of England base rate plus 2.5%.

HMRC has also introduced a repayment interest as of 1 January 2023 where HMRC will pay the taxpayer’s repayment interest on any VAT that they are owed.

This will be calculated from the day after the due date or the date of submission (whichever is later) and until the day HMRC pays you the repayment VAT amount due to the taxpayer in full. Repayment interest will be calculated as the Bank of England base rate minus 1%. The minimum rate of repayment interest will always be 0.5% even if the repayment interest calculation results in a lower percentage.

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