HMRC introduced a new VAT Penalty System on 1st January 2023. This system replaced the old default surcharge regime and introduced a clearer, points-based approach to late submissions and payments.
Businesses that understand this system can protect themselves from unnecessary fines and interest charges.
How the VAT Penalty Points System Works
The penalty points system encourages businesses to submit their VAT returns on time. Every late submission earns a penalty point, similar to points on a driving license. These points accumulate until they reach a set threshold. Upon reaching the threshold, HMRC charges a £200 penalty. Each further late submission while at that threshold results in an additional £200 fine.
The threshold depends on how often you submit VAT returns:
- 2 points for Annual Returns
- 4 points for Quarterly Returns
- 5 points for Monthly Returns
For example: A business filing quarterly returns can miss three deadlines without an immediate fine but will collect three points. Missing a fourth deadline reaches the four-point threshold, triggering a £200 penalty. Every additional late submission after that point triggers another £200 fine.
Penalty points do not last forever. If you remain below the threshold, they expire after two years. However, once you reach the threshold, you must complete a “good compliance period” to reset your points. This period demonstrates your ability to file on time:
- 24 months for Annual Returns
- 12 months for Quarterly Returns
- 6 months for Monthly Returns
During the good compliance period, you must file all returns on time and submit any previous outstanding returns.
Penalties for Late VAT Payments
The new VAT penalty system also applies to late payments and uses a tiered structure:
- No penalty for 0 to 15 days late, if you pay or arrange a payment plan
- 2% of the outstanding VAT for 16 to 30 days late, calculable on the balance on day 15
- An additional 2% of the balance owed at 30 days for 31+ days late
- From day 31 onwards, a daily penalty of 4% per year accrues until you make the full payment
Interest is also chargeable on VAT at the Bank of England Base Rate plus 2.5%. Even small delays can become expensive if left unresolved.
For example: If your VAT bill is £10,000 and you pay 40 days late, you will face two 2% penalties (£200 each) plus daily interest. Longer delays can lead to substantial extra costs as the 4% annual penalty continues to accumulate.
Contact Us
We are not just accountants; we are Chartered Accountants with one of the most reputable and premium accounting bodies. We are registered and regulated by ACCA; so you can rest assured that you are in good hands. Knowing this, don’t hesitate to get in touch with us if you require assistance: Pi Accountancy | Contact Us