What are the VAT Late Filing Penalties?

The VAT late filing penalties under MTD will be used from the 1 January 2023 and they will replace the previous default surcharge regime.

Late payment and late payment interest on VAT payments will also change from January 1 2023.

HMRC have brought in a number of new features with the new VAT late filing penalty regime generally being seen as a welcome upgrade.

The stand out difference is the use of points to calculate the value of a VAT penalty. It’s not dissimilar to the points regime used by the DVLA for speeding.

It’s worth understanding how the making tax digital VAT penalties could effect your business should you ever file after the deadline.

What are the Late VAT Filing Penalties?

The VAT late filing system is points based with a point being automatically generated for each late VAT return.

The system allows for some points to be accumulated before a penalty becomes due with a threshold being set depending on how often you submit your VAT returns.

When a VAT late filing penalty threshold is met you will incur a fixed penalty charge of £200.

A £200 penalty is applied for each late VAT return so if you have three late VAT returns the penalty will be £600.

VAT Late Filing Penalty Points

The VAT late filing penalty points differ based on the frequency of your accounting period.

If you submit your VAT monthly you receive a higher points threshold in comparison to a business submitting one a year.

Can my VAT Penalty Points Expire?

A VAT late filing penalty point can expire if certain rules met. The system effectively rewards you for something that HMRC calls good compliance and allows the penalty system to reset and deduct a penalty point from your record.

• If your penalty points total is less than the threshold a penalty point will automatically expire after 24 or 25 months (depending on which day of the month you submit your VAT return).
• If your penalty points total is at the threshold a penalty point will not expire automatically after 24 months.

For a penalty point to expire you will need to complete your outstanding VAT returns for the previous 24 months and in addition complete a period of compliance where all returns are submitted on time.

The period of compliance when the points threshold is met is:

• 12 months for a quarterly VAT return submission.
• 6 months for monthly VAT return submissions.
• 24 months for an annual VAT return submission.

Will VAT Late Filing Penalties be effected by VAT due?

Late VAT filing penalties under the default surcharge regime were connected to the VAT due for that period.

From 1 January 2023 VAT late filing penalties will not be calculated based on VAT due which in comparison to the previous penalty system could make a substantial difference to a future VAT late filing penalty.

VAT Nil Returns and VAT Late Filing Penalties

Because the VAT penalty system is no longer using VAT due as a way to calculate penalties businesses and taxpayers who submit nil returns (and repayment traders) will be eligible for late return penalties which was not the case under the previous penalty system.

This is an important amendment for those who have previously submitted VAT returns late knowing that penalties would not be applicable because no VAT is payable.

VAT Late Payment Penalties

Late VAT payment penalties have been revamped as well built on an ethos of encouraging those who are struggling to pay on time to get in touch with HMRC ASAP to discuss a time to pay arrangement.

There are potentially three penalties based on the lateness of payment:

• Initial penalty of 2% of the VAT not paid up to date 15.
• An additional 2% on VAT unpaid from day 16 up to day 30.
• From day 31 of being late a daily charge of 4% of the VAT due paid.

HMRC will cancel penalties if a time to pay (TTP) arrangement can be made to pay them the VAT you owe.

A TTP arrangement is a sensible step with penalties being avoided and HMRC receiving what is owed in a timely manner.

Late payment interest for VAT

Late payment interest applicable to VAT is being adjusted to the bank of England base rate plus 2.5%.

This will bring VAT late payment interest in line with other taxes from the 1 January 2023.