New VAT penalties and interest changes starting in 2023

This is essential information for any VAT periods starting on or after 1 January 2023. Being aware of these changes can save money and avoid problems when it comes to submitting a VAT return.  

HM Revenues and Customs are replacing the default surcharge with separate penalties for late returns and late payment of VA as well as introducing a new approach to charging interest on late-paid VAT. This aims is to simplify and separate penalties and interest. Don’t worry we’ve got all the important points below…

A points-based VAT penalty system

The process for late submission penalties will now work on a points-based system. For each VAT return you submit late within a certain timeframe, you will receive one late submission penalty point. Once a taxpayer reaches a certain penalty threshold, they will get a £200 penalty and a further £200 penalty for each subsequent late submission after that. In conclusion, get your submission in on time and no points for you, think of it as similar to golf.

Late VAT payment penalties

After submission, if the actual VAT payment is not paid on time, late payment penalties will be due. This applies even if the return was filed on time. The amount will differ and the sooner a payment is made, the lower the penalty rate will be.

A second penalty will then become payable on the remaining tax due. The second penalty is voided once the outstanding balance is paid in full, or once a payment plan has been agreed upon. 

Grace period with new VAT rules

HMRC is being extra nice by giving people some time to get used to the changes before the full penalties apply. There will be no first late payment penalty charges imposed for the first year from 1 January 2023 until 31 December 2023, provided that the VAT due is paid in full within 30 days of the payment due date obviously.

Charging late payment interest

From 1 January 2023, HMRC will charge late payment interest from the day a VAT payment is overdue to the day the payment is made in full. It will be calculated according to the Bank of England base rate plus 2.5%.

Welcome to repayment interest

Starting from 1 January 2023, the repayment supplement will be withdrawn.

For accounting periods starting on or after 1 January 2023, HMRC will pay taxpayers repayment interest on any VAT that is owed.

This payment 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 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.

If you would like some help with your VAT compliance, please get in touch!