Changes made to the VAT penalties and interest system

HMRC have introduced a simplified procedure for penalties and interest charged for the late submission or payment of VAT returns. The changes take effect for VAT periods starting on or after 01 January 2023.

wide shot of sailing dinghies on a lake next to a club house on a sunny day.

Previously HMRC operated a Default Surcharge system which gave rise to a Default Surcharge Penalty for the late submission or payment of a VAT return. The new procedure distinguishes between the late submission of a return and the payment of VAT due on a return.

Under the new procedures, HMRC will operate a points-based system. Taxpayers will receive one penalty point for each return submitted late. For quarterly returns, the penalty threshold is four points, at which point a £200 fine is imposed. 

For example, if returns are submitted quarterly, should the taxpayer submit four returns late, they will accumulate four penalty points and be liable to an automatic £200 fine. Following this, a £200 fine will be incurred for each late return.

The penalty threshold for taxpayers who submit monthly returns is 5 penalty points.

Penalty points are only removed after 2 years of full compliance following the imposition of the original penalty point.

Additional penalties

The new system imposes an additional penalty where payment of the net VAT due on the VAT return is paid after the due date. The penalty amount increases to reflect the period of time the payment is overdue.

For example, where a first late payment is made up to 15 days late for two returns, no penalty is due.

However, where the first late payment is overdue between 16 and 30 days, a penalty is incurred of 2% of the VAT owed. This increases to a maximum daily charge of 4% per year on the outstanding balance until the settlement is made in full.

In addition to the late submission penalty and the late payment penalty HMRC will charge Late Payment Interest at a fixed rate of 2.5% over and above the Bank of England base rate. 

The new procedure will inevitably result in larger fines being imposed by HMRC than that applied under the old system. This being so, should any club be unable to submit a return or make the VAT payment due they are strongly encouraged to speak with HMRC at the earliest opportunity to seek a suitable Time to Pay or similar arrangement to mitigate any arising penalties that will be due under the new system.

Find further support

If you are a RYA affiliate and have a VAT enquiry, you can contact VAT expert Russell Moore for 30-minute consultation as part of your affiliation benefit. Russell can make the PESM application on behalf of RYA affiliated clubs for a fixed fee of £250. Contact Russel | 07710 329317.