In 2022, the HMRC announced changes to the penalties for the late filing and payment of VAT. These changes took place for VAT periods starting on or after 1 January 2023.
Due to these changes, a period of familiarisation was introduced to ease businesses and individuals into the new format of penalties where HMRC were not charging a first late payment penalty.
However, this period of familiarisation is coming to an end on 31 December 2023. Here’s everything businesses and individuals need to know:
Late submission (filing) of your VAT return
Firstly, there are penalties for submitting/filing your VAT return late. The new penalty system introduces a “Penalty Points Threshold”, if you were to reach the threshold then a penalty of £200 will be applied. Then, each subsequent late filing of a return will incur an additional £200.
The threshold varies depending on your VAT submission frequency. One penalty point is awarded for each late submission and once you reach the threshold the £200 penalty will be applied.
|Submission Frequency||Penalty Points Threshold|
Late payment of the VAT
Next up is a penalty for not paying your VAT on time. The late payment penalty system depends on how late the payment is received by the HMRC. Please see below how the system works:
|Payment overdue by||Penalty charge|
|Up to 15 days overdue||No penalty|
|Between 16 and 30 days overdue||2% on the VAT owed at day 15|
|31 days overdue||
Here’s an example of how the above could be:
If ‘ABC Company’ submitted their March 2024 quarterly VAT return on time (7th May 2024) but did not pay the £10,000 VAT, they owed. The penalty scale would be as follow:
- If the payment is made within 15 days – between 8 May 2024 to 22 May 2024 = No Penalty.
- If the payment is made between 16 and 30 days overdue – between 23 May 2024 to 6 June 2024 = 2% late payment penalty of £200.00.
- If the payment is made 31 days after the overdue date – on 7 June 2024 and thereafter. Assuming payment was made on the 40th day after the overdue date, 16th June 2024.
- 2% of the amount outstanding on day 15, meaning a penalty of £200
- 2% of the amount outstanding on day 30 day, meaning a penalty of £200
- There will be 10 days at the 4% per year daily rate and a penalty of £10.96 (£10,000 x 4% x 10/365 days)
Late payment interest
Unfortunately, it doesn’t stop there. In addition to the late filing and payment penalties, the HMRC also charge interest on the late payment of any outstanding VAT at the Bank of England’s base rate plus 2.5%.
Let’s spell that out using the same example above:
Assuming a Bank of England base rate of 5% this would mean an interest rate of 7.5% and total interest of: £82.19 (£10,000 x 7.5% x 40/365)
Giving an overall total of: £493.15
As you can see any late filing or payments of VAT, can be expensive and complicated to manage.
Here are three steps to help individuals and businesses avoid these issues:
- Set up electronic reminders on email, calendar apps, or in your accounting software to notify you well in advance of due dates.
- Establish a routine for reviewing your financial records and preparing the necessary documents in a timely manner.
Organise your financial records:
- Keep your financial records, including invoices, receipts, and financial statements, well-organised.
- Use accounting software or hire a professional accountant to ensure accurate and up-to-date financial records.
- Regularly reconcile your accounts and perform internal audits to identify any discrepancies that need correction before filing.
Allocate sufficient resources:
- Always allocate adequate resources, both financial and people, for your VAT compliance.
If you are having any problems with VAT or if you would like someone to help prepare you for VAT registration, don’t hesitate to contact us.