26 Jan

VAT Penalty System Reform!

The introduction and rollout of the widely reported Making Tax Digital (MTD) for VAT for all VAT traders was to be accompanied by two completely new penalty regimes; for late VAT payments and for the late filing of VAT returns. The new types of penalty will now apply from 1st January 2023.

It is not clear the first VAT return that will be affected by the new regime, whether it will commence for VAT periods beginning on or after 1st January 2023 or if they will apply to payments and VAT returns due on or after that date.

This is not the first postponement of the start of this new penalty regime – it was due to come into effect from 1st April 2020, after the end of the first ‘soft landing’ period of MTD filing for the vast majority of VAT registered businesses. However, the start dates for both penalty regimes were pushed back to 1st April 2022, which would coincide with the full launch date of MTD for VAT.

This second delay to 1st January 2023 is not tied to the MTD timetable (as far as we know) as appears to be solely to allow more time for HMRC to build and test its IT system.

The Minister who announced the delayed launch reassured tax advisors and their clients said, “The ambition and pace of change needs to be balanced with well-tested systems and good customer service, particularly when businesses are facing additional challenges and uncertainty.”

What is the new system for late payments?

Currently, the default surcharge system, which applies to late filing and late payment, is unique to VAT and can produce some very unfair results. One day of delay in paying VAT can produce a penalty of 15% of the unpaid amount.

The new late payment rules should be fairer, but they could hit small businesses much harder as there will be no easement where turnover is low.

Under the new regime, there will be much more flexibility to allow for unintentional short payment delays. All businesses will get a 15-day grace period in which to pay their VAT bill, during which there will be no penalty at all. Also, if a time to pay agreement is reached the penalty clock will stop.

The new regime will issue automatic penalties, with no warning messages or default periods (although this could change), when the VAT payment is late by:

  • 15 to 30 days – 2% penalty
  • Over 30 days – 4% of the late paid tax.
  • 31 days or more – daily penalties at 4% of the outstanding amount

In addition to the late payment penalty, the taxpayer will also be charged interest on any tax paid late at the rate of 2.5% plus the Bank of England base rate. This is in line with other taxes.

What is the new system for late filing?

The taxpayer will only be subject to a financial penalty for late filing if they have accrued sufficient points for an accumulation of late filings with a certain number of VAT returns under MTD.

The points threshold will depend on the submission frequency of the return:

VAT Penalty Table

Under the new regime up to three quarterly VAT returns may be late with no penalty, but on the fourth late submission an automatic financial penalty of £200 is triggered. Also, every late submission after that threshold has been breached will trigger another £200 fine, but those additional penalties will not add points to the points slate.

The taxpayer will be able to appeal against all points and penalties awarded, and tax advisors will likely be able to do this on behalf of the taxpayer should they have authorisation to do so.

Each point will expire after two years, and this lifetime clock starts running from the month after the month in which the late filing occurred, not the month when HMRC tell the taxpayer the point has been levied. HMRC has 11 weeks to levy points after the quarterly filing deadline is missed, 48 weeks for annual filings, and just two weeks for monthly filings.

The points slate can only be wiped clean when the taxpayer achieves both of:

  • No late submissions the period of compliance for their submission frequency, as shown in the table above; and
  • All returns filed for the previous 24 months, even if they have been filed late.

Roll out to all MTD regimes 

These new late payment and late filing penalty regimes are due to apply for taxpayers within MTD ITSA, from 6 April 2024.

All other income tax payers who are in self-assessment are due to be subject to these new penalty regimes from 6 April 2025.


If you have any concerns or queries regarding the new late payments and penalties system, please do not hesitate to contact your client manager or our office on 01257 255521.



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