Late VAT Return Submission and VAT Payment Penalty Changes

If you have a VAT-registered business and have previously submitted a late VAT return or payment, you may be familiar with the default surcharge scheme.

For VAT return periods starting on or after 1st January 2023, the default surcharge scheme has now been replaced and a new late submission financial penalty scheme applies if you submit your VAT return late. This also includes nil or repayment returns that are submitted after the deadline.

Separate late payment penalties also now apply if you pay your VAT liability late. Read on for the breakdown of these changes.

How do Late VAT Return Submission Penalties Work?

Late VAT return submission penalties now work on a points-based system. For each VAT return submitted late, you will receive 1 penalty point until you reach the penalty point threshold which is dependent on your accounting period.

When the penalty point threshold is reached, you’ll automatically receive a £200 penalty. You’ll also receive a further £200 penalty for each subsequent late submission when you’re at the penalty point threshold.

What are the Late VAT Return Penalty Point Thresholds?

The penalty point thresholds vary depending on whether you submit your returns annually, quarterly or monthly.

  • Annual VAT returns – 2 points
  • Quarterly VAT returns – 4 points
  • Monthly VAT returns – 5 points

If you reach the penalty point threshold and receive a £200 penalty, you will then enter a penalty period. During the penalty period, you need to make sure a period of compliance follows by ensuring your VAT returns are submitted on time in subsequent submission periods.

For example, if you submit your returns quarterly then you would need to ensure the next 4 returns are submitted on time to exit the penalty period and avoid incurring any further late filing penalties.

The compliance periods are:

  • Annual VAT returns – 24 months
  • Quarterly VAT returns – 12 months
  • Monthly VAT returns – 6 months

Provided you submit everything on time for the duration of the compliance period, as well as any outstanding VAT returns from the previous 2 years, your penalty points will be reset.

How do Late VAT Payment Penalties Work?

Late payment penalties can apply to any payments on VAT due which are not paid in full by the relevant due date, except for instalments for the VAT annual accounting scheme.

If your VAT liability is paid in full within 15 days after the date it was due to be paid, no penalties will apply. However, if your VAT liability is paid later than 16 days after the date it was due, the following penalties will apply:

  • VAT paid between 16 and 30 days after the deadline (first occurrence) – The payment penalty would be calculated at 2% of the VAT still outstanding at day 15
  • VAT paid more than 31 days after the deadline (first occurrence) – The payment penalty would be calculated at 2% of VAT still outstanding at day 15 and another 2% of what is still outstanding at day 30

For example, if you submit a VAT return with a VAT liability of £2,000 and this was due for payment by the 7th of the month, if the VAT is paid 31 days after the due date the penalty would be £80. If the VAT was paid between 16 and 30 days late, the penalty would be £40.

In addition to the above late payment penalties, HMRC will also charge late payment interest on any amounts overdue. This will be charged from the first day the payment is overdue until the day it is paid in full. This is currently calculated at the Bank of England base rate plus 2.5%.

How to Avoid VAT Penalties

Submitting your VAT return on time and paying your liability in full and on time are the only ways to be certain of avoiding being issued with penalty points and potentially being hit with penalties and interest. If you’re unable to pay your entire VAT bill, filing your VAT return on time and paying as much as you can as soon as you can helps to reduce the penalties you’ll incur.

If for any reason you’re unable to pay your VAT liability on time, we would always advise you to contact HMRC as soon as possible and seek a time to pay agreement. If HMRC agrees a time to pay with you, provided you stick to the payment schedule you won’t incur any late payment penalties but interest would be accrued on the overdue amount.

One way to help reduce the risk of incurring late payment interest and penalties is by setting up a direct debit to collect VAT payments automatically. This also gives you a further 3 working days leeway for the payment to be collected after the due date.

If you want to set up a direct debit, you can do so via your business tax account which can be accessed here.

As expert VAT accountants, we can offer support and advice if you have any queries on your VAT returns and the new penalty system. If you’re a Gorilla Accounting client please contact your dedicated accountant, otherwise please call 0330 024 0406 or request a call back.