New VAT penalty regime for late submissions and late payments

As part of the harmonisation of various tax penalty regimes, the rules regarding late submissions of VAT returns, and their related payments, changed on 1 January 2023. A points-based system now applies, replacing the previous rules based around “default surcharges”.

The due date for submission of VAT returns and making any associated payment is one month and seven days after the end of the return period (two months for businesses under annual VAT reporting).

Late submissions

When a taxpayer misses a submission deadline, they incur a point. When a taxpayer reaches a specified points threshold, a penalty of £200 is charged. A further penalty will be charged for each further missed filing while they remain at the points threshold.

Provided that the taxpayer has not reached their points threshold, points expire automatically after 24 months. However, if the threshold is reached, they must complete a “period of compliance” without any late submissions in order to reset their points to zero. The first day that this period of compliance can commence is the first day of the month following the date one day after the missed deadline (e.g., 1 May for a missed deadline on 31 March).

The points threshold and the period of compliance are based on the taxpayer’s return frequency:
Return frequency             Points threshold             Period of compliance
Annual                                           2                                          24 months
Quarterly                                       4                                           12 months
Monthly                                          5                                           6 months

Late payments

Penalties for late payment are tax-geared and depend on the degree of lateness:

• Payment within 15 days of the due date: no penalty
• Payment between 16 and 30 days overdue: 2% of the tax unpaid after 15 days
• Payment more than 30 days overdue: 2% of the tax unpaid after 15 days + 2% of the tax unpaid after 30 days. A second penalty will also be charged, accruing daily at a rate of 4% p/a.

A “period of familiarisation” will run for the first 12 months of the new regime (i.e., 1 January 2023 to 31 December 2023), during which no penalty will be charged for late payments that are no more than 30 days overdue.

HMRC has published guidance on the new regime on GOV.UK, here:

However, not yet addressed in guidance is whether (and if so, how) any existing default surcharge history will transfer into the new regime. We expect that this will be clarified in due course.
If you have any questions or concerns, please reach out to your usual DSG contact for assistance.