HMRC Penalty Regime

14th March 2023

From 1 January 2023, HMRC has introduced a new penalty regime for VAT returns that are submitted late and it applies to all VAT returns, even if it is a nil return or a return that claims a repayment from HMRC.  The regime comprises penalty points for late returns and percentage penalties for late payments.

The late submission of a VAT return incurs a penalty point, which mount up until the penalty point threshold is reached. This will result in a penalty of £200 for each subsequent late return while the business is at the threshold.

The penalty point threshold is set according to the frequency returns are submitted. Annual returns have a two point threshold, quarterly returns have four points and monthly returns have five points.

Penalty points expire automatically depending upon the due date. Where the deadline for a return is not the last day of a month, the penalty point expires on the last day of the month, 24 months afterwards. Where the deadline is the last day of the month, the points expire on the last day of the month, 25 months afterwards. Where the penalty points threshold has been reached, the penalty points can only be removed if both of the following apply.

• A period of compliance has been completed. This usually means that the next four VAT returns must be submitted on time if the business uses quarterly returns.
• All outstanding returns for the previous 24 months have been submitted.

There are also penalties if the VAT payment is not received by the due date.  These are

• 2% of the outstanding amount on day 15, if the payment is not made by this date
• This is increased by a further plus 2% payment is not received by day 30.
• a daily rate of 4% per year on the balance outstanding at day 30, charged each day from day 31 until the outstanding balance is paid in full.

The penalty can be reduced by paying off outstanding amounts. Penalties can also be reduced by making a Time to Pay arrangement with HMRC.

In addition to the late payment penalty, interest is also charged on any unpaid amounts of VAT. It is charged from the first day that the payment is overdue until the VAT is paid in full. Interest is charged at the Bank of England base rate plus 2.5% on the outstanding amount.

For further information or if you require any assistance, get in touch with our team