Things you need to know about HMRC’s new penalty point system for late VAT return submissions

If you run a VAT-registered business, you should be aware that HMRC has introduced new penalties for late submission of VAT returns for accounting periods starting on or after 1 January 2023. These also apply to nil or repayment VAT returns.

The new rules replace the VAT default surcharge, although this will continue to apply to late submissions made in VAT accounting periods starting on or before 31 December 2022.

How the new late submission penalties work

• You must send your VAT return by the deadline for your accounting period (ie the period for which you need to submit a VAT return to HMRC).
• The new late-submission penalty system is points based. You get a penalty point for every VAT return that’s submitted late, until you reach a threshold.
• When you reach that threshold, a £200 penalty is payable. There’s another £200 penalty for any other late submissions while you’re at the threshold.

Which late submission penalty points threshold applies to you?

Your accounting period determines your penalty point threshold.

• If your VAT accounting period is annual, the penalty point threshold is 2.
• If your VAT accounting period is quarterly, the penalty point threshold is 4.
• If your VAT accounting period is monthly, the penalty point threshold is 5.

Example: quarterly VAT accounting period

If you submit your VAT return quarterly, but have been late three times, you’ll have three penalty points. If you’re late again you’ll get another penalty point, which means you’ve reached the threshold and must pay the £200 penalty. If you submit your subsequent VAT return on time, there’s no further penalty. However, if you file subsequent ones late, you must pay another £200 late-submission penalty for each one. 

What if you use a non-standard accounting period?

If HMRC has agreed to allow you to use non-standard accounting periods, the rules are different.

• If your accounting period is more than 20 weeks in length, the penalty point threshold is 2, the same as for an annual accounting period.
• If your accounting period is between 8 weeks and 20 weeks, the penalty point threshold is 4, the same as for a quarterly accounting period.
• If your accounting period is 8 weeks or less, the penalty point threshold is 5, the same as for a monthly accounting period.

What if you change your accounting period?

If HMRC lets you change your VAT accounting period, your threshold and penalty points will be adjusted accordingly. You cannot appeal adjustments to your penalty points. When you change your accounting period, HMRC will set your penalty points to zero if the adjustment gives you a minus figure. If you have zero points, no adjustment will be made. Your points will not change if you change from a non-standard accounting period to an equivalent standard period.

How to remove late VAT return submissions penalty points

• If you’ve not reached the threshold, individual penalty points will expire automatically, roughly two years after the date the relevant return was due.
• If you’ve reached the late submission penalty point threshold, to remove points so you avoid further £200 penalties, you must “complete a period of compliance, submitting all returns by their deadline” and “submit all outstanding returns for the previous 24 months”.

When don’t the new rules apply?

• The new late-submission penalty rules don’t apply to your first VAT return if you’re newly VAT registered or your final VAT return if you cancel your VAT registration.
• And they don’t apply to one-off VAT returns that cover a period other than a month, quarter or year (eg a one-off return covering a four-month period because you changed from submitting quarterly to annually).

Late payment interest if you don’t pay VAT or penalties on time

You’ll be charged late-payment interest on overdue payments for VAT accounting periods starting on or after 1 January 2023 (the VAT default surcharge will still apply to previous accounting periods).

Need to know! Late payment interest is charged from the first day that the payment is overdue until the day it’s paid in full. It’s calculated at the Bank of England base rate plus 2.5%.

If your payment is more than 15 days late, you’ll be charged:

• 16-30 days overdue – 2% on the VAT you owe at day 15.
• 31 days or more overdue – a first late payment penalty of 2% of what was outstanding at day 15, plus 2% of what is still outstanding at day 30; then a second late payment penalty of a daily rate of 4% per year on the outstanding balance charged everyday from day 31 until the outstanding balance is paid in full.
• The sooner you pay, the less you’ll pay in penalties and interest. If money is tight, you may be able to reach a Time to Pay agreement with HMRC.

How to appeal a point or financial penalty

If you miss a submission deadline, HMRC will write to you to tell you that you’ve been given a late-submission penalty point and/or that you need to pay a £200 penalty. This letter will either include an appeal letter or tell you how to appeal, by asking HMRC to consider your case and your appeal. If HMRC agrees that you have a reasonable excuse (eg your were seriously ill or your partner or a close relative died, etc), your penalty will be cancelled.

If you don’t have an appeal form, you can send a signed letter to HMRC, explaining why your return or payment was late, including relevant dates, your name and VAT registration number. Normally, you have 30 days to appeal from the date your penalty was issued.

If HMRC does not change its decision and you still disagree, you’ll be offered a review. You can check details of penalties in your VAT online account and request a review through your online account.

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Blog content is for information purposes and over time may become outdated, although we do strive to keep it current. It's written to help you understand your Tax's and is not to be relied upon as professional accounting, tax and legal advice due to differences in everyone's circumstances. For additional help please contact our support team or HMRC.