At the start of 2023, the United Kingdom was changed the way penalties and interest apply to late value-added tax (VAT) returns and payments. Businesses now get a penalty point when they submit a VAT return late, and perhaps financial penalties. Here’s what you need to know about the point penalty system — and how to avoid penalties.
For VAT accounting periods before December 31, 2022, late VAT returns and payments were subject to a VAT default surcharge.
As of January 1, 2023, HM Revenue & Customs (HMRC) is using a penalty points-based system that simplifies and separates penalties and interest. It’s designed to be more lenient on taxpayers who make the occasional slipup while still penalizing those who repeatedly fail to meet their obligations.
How does the points-based system for late VAT returns work?
If you fail to submit a VAT return by the due date of your accounting period, (e.g. monthly, quarterly or annually), penalty points and financial penalties will be applied.
Each time you file a late return, you will receive one penalty point. You will receive a £200 fine if you reach the threshold of penalty points for your accounting period – 2 for annual returns or quarterly returns and 5 for monthly.
Here is an example for a monthly VAT return by a company:
- If the company fails to file its VAT return for January 2024 on time, it will receive 1 penalty point.
- The VAT return for February 2024 was filed on time. No penalty points were assessed. However, it still had 1 penalty point.
- The company files its late VAT return for March, and receives another penalty point. This makes a total 2 points.
- The April VAT return was filed on time, but it still had 2 penalty points.
- Each month, the late filing of its VAT returns in May and June earns it 1 penalty point. The total penalty points is now 4.
- The company will be penalized again if it fails to file its VAT return for July on time and accumulates 5 penalty points. This is the threshold of penalty points for monthly filers. The company will be charged a £200 fine at this point.
- The company will not get any more points because it is already above the threshold. However, they will be charged another £200 for a second late VAT return.
Can I get my penalty points removed?
Yes. There are two ways to remove your late VAT return penalty points: The first applies to taxpayers who met their penalty points threshold; the second to taxpayers who accrued some penalty points but did not meet the threshold.
- You can reset your penalty point total to zero if you have reached your threshold.
Condition A: All VAT returns must be submitted on or before a certain date, which is determined by the reporting frequency.
- Returns for 24 months (2 VAT returns).
- Quarterly: 4 VAT returns in 12 months
- Monthly: six months of VAT returns
Condition A: HMRC received all VAT returns due in the last 24 months.
- Once you have filed your VAT returns and paid any VAT due, you will no longer be able to accrue penalty points.
Do penalties apply to late nil returns?
Yes, you must file a VAT return on time even if you have no VAT to report (i.e., a nil VAT return).
What are the penalties for paying VAT late?
The VAT late payment penalty is on top of the £200 penalty assessed for filing a return late. These penalties vary depending on the action you take: The sooner you remit your VAT late payment, the lower the penalty rate will be.
VAT late payment penalties are assessed in two different ways:
- The first VAT late payment penalty is calculated on outstanding amounts on day 15 and day 30.
- The second VAT late payment penalty is calculated on outstanding amounts from day 31 until you pay in full.
Can I appeal penalty points or late payment penalties?
You or your agent can appeal late filing penalties or points.
How can I avoid paying VAT penalties?
To avoid penalty points and late VAT payment penalties, it is best to submit VAT returns on time and make VAT payments.
Account Ease helps businesses of all sizes file VAT returns and pay VAT on time. Contact us to learn more.
