VAT Penalty System
Under the new rules, if you submit your VAT return late, you may incur penalties. This change applies to all VAT accounting periods starting on or after 1 January 2023. Whether your return shows a payable VAT amount, a nil return, or a repayment, late submission could trigger a penalty.
How the Penalty Points System Works
The new system introduces a penalty points scheme. Submitting a VAT return late adds a penalty point to your account. Once your points reach a certain threshold, you will receive a £200 fine. After reaching the threshold, every subsequent late submission will result in another £200 fine.
- For example: If your business submits VAT returns quarterly, the threshold is four points within a rolling 12-month period. If you submit a return late, you earn one penalty point, starting a 12-month countdown. If you submit all returns on time during the next 12 months, the penalty point disappears. However, if you file another late return within that period, you gain a second penalty point, and a new 12-month period begins.
This system also applies to businesses submitting VAT returns annually or monthly, with the threshold adjusted accordingly. You can appeal penalty points and fines.
Changes to Late Payment Penalties
Late payment penalties are also changing under the new VAT regulations. These changes replace the old VAT default surcharge and introduce a more structured penalty system. The new rules apply to any VAT payments not made in full by the due date, excluding payments on account and instalments under the VAT Annual Accounting Scheme.
Breakdown of Late Payment Penalties
The new system tiers late payment penalties according to how overdue your payment is:
- Payment up to 15 days overdue: No penalty applied.
- Payment between 16 and 30 days overdue: A 2% penalty calculated on the amount owed as of day 15.
- Payment 31 days or more overdue: The penalty escalated as follows:
- 2% of the amount outstanding at day 15.
- An additional 2% of the amount still outstanding at day 30.
- Plus, a daily rate penalty of 4% per year on the outstanding balance, accruing from day 31 until full payment made.
This system encourages prompt payment and penalises those who delay payments significantly.
What These Changes Mean for Your Business
The introduction of penalty points and a structured payment system means that businesses need to be more vigilant in submitting VAT returns and making payments on time. The penalties can quickly add up, especially for businesses that frequently file or pay late.
To avoid these penalties, it’s essential to stay organised, keep track of deadlines, and consider setting reminders for when VAT returns and payments are due. Additionally, familiarise yourself with the appeal process to benefit if you believe the penalty is unfair.
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