VAT Penalties & Interest: The New Regime (Updated September 2024)

The VAT default surcharge system is no more! As of January 1, 2023, a new penalty and interest regime governs VAT accounting periods. Let's delve into the updated rules and how they impact your business.

Late Filing Penalties: The Points System

• Points for Tardiness: Every late VAT return, even nil or repayment ones, earns you a penalty point.

• Penalty Thresholds:

  • Annually Filed Returns: Penalty at 2 points

  • Quarterly Filed Returns: Penalty at 4 points

  • Monthly Filed Returns: Penalty at 5 points

• £200 Fine: Once you hit the threshold, it's a £200 penalty and another £200 for every subsequent late return.

• Resetting Points: You can wipe the slate clean if all returns are on time for your compliance period (6/12/24 months) AND all returns for the previous 24 months have been submitted.

Late Payment Penalties: Grace Period & Percentages

• 15-Day Grace Period: No penalty if you pay within 15 days of the due date. Phew!

• 16-30 Days Late: 2% of the VAT owed at day 15.

• 31+ Days Late: 2% of the VAT owed at day 15 PLUS 2% of the VAT owed at day 31.

• Time to Pay Arrangements: Penalties are based on the agreement date.

• Additional Penalty: When the balance is cleared or a payment plan is agreed, there's a further penalty at a daily rate of 4% per year for the debt's duration.

• First-Year Leniency: For 2023, no late payment penalty if you pay in full within 30 days. HMRC's giving you a bit of breathing room to adjust.

Interest: It's a Two-Way Street

• Late Payment Interest: Charged daily from the due date until full payment, at the Bank of England base rate plus 2.5%.

• Repayment Interest: HMRC will now pay you interest on VAT they owe you! The rate is the Bank of England base rate minus 1%, with a 0.5% minimum.

Key Takeaways

• The new regime is points-based for late filing and percentage-based for late payments.

• HMRC is getting stricter, but they're also offering some leniency and even paying you interest on late repayments.

• Timeliness is key! Aim to submit and pay on time to avoid penalties and interest.

• If you're struggling, explore Time to Pay arrangements with HMRC.

Remember, this is a simplified overview. Always consult official HMRC guidance or a tax professional for specific advice tailored to your situation.