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VAT penalties – What do the changes mean for you?

From 1 January 2023, new VAT late filing and payment penalties will apply to anyone required to regularly record and report VAT information. 

This upcoming change reflects the new system for reporting and recording VAT, introduced under Making Tax Digital (MTD).

This requires all VAT-registered firms to record and report their VAT information digitally, using compliant software, every quarter.


How will you be affected?

VAT-registered businesses submitting VAT information to HM Revenue & Customs (HMRC) on or after 1 January 2023 will be subject to a new points-based system.

Late submission penalty points will also apply to any nil or repayment VAT returns that are submitted and received late.

For each VAT report that is submitted late, you will be given one penalty point. Once you have accrued a certain number of points and reach your threshold you will face a fine.

The penalty threshold will depend on your submission frequency but once you meet your specific threshold you will be given a £200 penalty to pay and for each subsequent late submission following, another £200 penalty will be added.

For annual submissions, the penalty point threshold is two points, for quarterly submissions, it is four points and for monthly submissions, it is five points.

To avoid consistent penalty fees, you can reset your points to zero by ensuring HMRC has received all your outstanding returns for the last 24 months and submitting your VAT returns and reports before the due date for your period of compliance, which is dependent on your submission frequency.

Late payment penalties

Penalties for late payments will depend on how late the payment is:

Up to 15 days late 
You won’t pay a penalty if you pay your VAT payment or decide on a payment plan within 15 days of the due date.

16 to 30 days late 
If you pay within 16 to 30 days, your first penalty will be calculated from two per cent of the VAT you owe on day 15.

31 days and longer
The previous penalty will apply as well as another two per cent from day 30 added on.

A daily rate of four per cent each year for however long you owe VAT will apply as a second penalty.

As these are significant changes, HMRC will not charge the first late penalty for the year between 1 January 2023 and 31 December 2023 if you pay the full charges within 30 days of your original due date.

Starting 1 January 2023, late payment interest will be charged every day beginning the first day your payment is overdue till the day you pay in full.

You also need to ensure you are complying with the Making Tax Digital software as from 1 November 2022, your online VAT account cannot be used to make monthly or quarterly payments.

Instead, you need to be signed up for MTD and use the compatible software to file your returns.

For more advice on this, contact us today.