UK new penalty and surcharges system in January 2023
UK announced a new penalty and surcharges system applicable to late VAT return submission and VAT payments from January 2023. This new system raises the possibility for taxpayers to receive a penalty or surcharge from HRMC.
HMRC announced a new VAT penalties and interest charges regime to replace the previous default surcharge regime for reporting periods starting on 1 January 2023. This will affect UK VAT-registered businesses submitting late VAT returns or making late VAT payments. The official guidance on the new penalty and interest charges system can be found here.
This new system increases the possibility for taxpayers to receive a penalty or surcharge from HRMC. This is because if we had only a surcharge regime applicable to the late VAT payments, now there are two penalty regimes applicable separately for the late submission and the late VAT payment.
Check here the official information from HMRC about the new penalty and interest charges regime applicable to late VAT returns submission and VAT payments. This new system increases the possibility for taxpayers to receive a penalty or surcharge from HRMC, as well as the penalty and interest amounts.
UK old default surcharge regime
In practice, there are no penalties for a late VAT return provided the payment has been made in time. However, a "Surcharge Liability Notice" may be initiated when missing one return.
When a taxpayer pays late the correspondent VAT amount for a reporting period, HMRC records a ‘default’ on their account, starting a twelve-month surcharge period. For the first late VAT payment made during the surcharge period, there is no surcharge payment due. Also, there is no surcharge payment if the return is submitted late, but there was no VAT due for the period.
During the surcharge period, different interest rates apply depending on the annual turnover of the company, and on how many times the taxpayer paid the VAT late. The full surcharges table published by the HMRC can be found here.
Also, penalties may apply in other scenarios, for example, when sending an incorrect VAT return with a wrong VAT position, or when submitting a paper VAT return without being allowed to it.
UK penalty and interest changes system applicable from 2023
From 1 January 2023, separate penalties apply for the late submission of a VAT return and the late VAT payment. Therefore, even if a VAT return is in a credit position or nil, there might be a penalty applicable for a late submission.
VAT returns submitted late
This works on a points-based system: whenever you submit a VAT return after the statutory deadline, you will receive a penalty point. If you exceed the applicable penalty point threshold, you will receive a GPB 200 fixed penalty for each late submission.
This is the points system table based on the reporting period, as published by HMRC:
Annually2 penalty points (24 months - period of compliance)
Quarterly4 penalty points (12 months - period of compliance)
Monthly5 penalty points (6 months - period of compliance)
Late VAT payments
For late VAT payments, the applicable penalty rate depends on how soon you have made the VAT payment.
- Up to 15 days overdue: during this period, taxpayers do not receive a penalty if they pay the VAT in full or agree on a payment plan with HMRC.
- Between 16 and 30 days overdue: taxpayers will receive an initial penalty calculated at 2% on the VAT due or agree a payment plan.
- VAT is unpaid after 30 days: the penalty increases up to 4%, because you will receive a first penalty calculated at 2% at day 15 days, plus 2% on the VAT due by day 30. You 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.
Additionally, HMRC will charge late payment interest from the day payment is overdue to the day payment is made in full, calculated at the Bank of England base rate plus 2.5%.
Finally, in order to make the introduction of the new system smoother, HMRC grants a transition period beginning from 1 January 2023 until 31 December 2023. During this period, HMRC will not charge a first late payment penalty if the taxpayer pays the VAT amount within the first 30 days after the deadline.
Check the applicable deadlines for VAT returns in our UK VAT manual.