New VAT Penalty Regime: What You Need to Know About Late Submission Penalties

A new penalty regime for VAT was introduced on 1 January 2023, comprising late submission penalties and late payment penalties. In this post, we'll take a closer look at the penalty regime for late returns.

Under the new regime, a VAT-registered business will receive a penalty point each time they file their VAT return late, regardless of whether VAT is owed to HMRC or whether the business is reclaiming VAT back from HMRC. Once a certain number of penalty points have been accumulated, the business will receive a financial penalty of £200.

The number of penalty points required to trigger a financial penalty depends on how frequently the business files VAT returns. For annual returns, it's two penalty points; for quarterly returns, it's four penalty points; and for monthly returns, it's five penalty points. Penalty points have a lifetime of two years, after which they expire.

To reset the penalty points total to zero, the business must achieve a period of compliance by meeting all submissions in their compliance period. The compliance period is 24 months for businesses filing annual VAT returns, 12 months for businesses filing quarterly returns, and 6 months for businesses filing monthly returns. They must also have made all the submissions that were due for the preceding 24 months (regardless of whether the submissions were initially late).

HMRC has the discretion not to charge a penalty if they consider it appropriate. Time limits also apply during which penalty points must be levied, and points cannot be issued outside this window. The window runs from the date the return was due and is set at 48 weeks where VAT returns are submitted annually, 11 weeks for quarterly returns, and 2 weeks for monthly returns. HMRC must also issue a financial penalty within two years of the failure that took the penalty points to the penalty threshold.

So be sure to file your VAT returns on time to avoid accumulating penalty points and incurring financial penalties!