On 1st January 2023, changes were made to fines for late VAT filing and payments. Previously, the default VAT surcharge system was in place. This system meant that you would be fined a percentage of the VAT owed. This started at 2%, then increasing to 5%, 10%, and 15% every time a payment or VAT return was missed.
The new system implements a point system for late submissions, as well as new penalties and interest charges on late payments.
Late Filing Points System
The late filing point system works on the basis that every time VAT is submitted late, you will receive a penalty point. Once the penalty Point threshold is reached, a £200 penalty is applied. A further £200 penalty is issued for every late submission whilst at the threshold. The threshold is dependent on how frequently you submit your VAT return:
| Accounting Period | Penalty Points Threshold |
| Annually | 2 |
| Quarterly | 4 |
| Monthly | 5 |
HMRC will adjust both the threshold and the points you have been issued if you change your accounting period.
The penalty rules do not apply to the first VAT return, final VAT return, or one-off returns which cover a period other than those listed in the table above.
HMRC will issue a penalty decision letter to your registered business address if a penalty or penalty point has been given. This letter will offer a review with HMRC where you will be able to appeal the penalty. Also, penalties can be checked, and reviews can be requested through your VAT online account.
Late Payment Penalties
Late payment penalties have been introduced and can apply to any VAT that has not been paid in full by the due date. This is excluding payments on account and annual accounting scheme installments. The penalty you will receive is dependent on both the number of days that the payment is overdue, and if it is your first penalty:
| First Late Payment Penalty | Second Late Payment Penalty | |
| Payments up to 15 days overdue | None | None |
| Payments 16-30 days overdue | 2% of the VAT owed at day 15 | None |
| Payments 31 days or more overdue | 2% of what was outstanding at day 15. Plus 2% of what is still outstanding at day 30. | Daily rate of 4% per year on the outstanding balance. This is charged from day 31 until the outstanding balance is paid in full. |
A period of familiarisation has been implemented until 31/12/2023. This means that first late penalties will not take effect if a payment is made within 30 days of the payment due date.
Much like the late filing penalties, HMRC will notify you of a late payment penalty via a penalty decision letter and details of the penalty will be available through your VAT online account.
Late Payment Interest
Late payment interest will now be applied from the first day that a VAT payment is overdue until the day it is paid in full. The interest rate directly correlates with the Bank of England’s base rate. It is calculated as the base rate plus 2.50%. This means that the current interest rate is 7.75%.
Payments that are subject to interest include:
- VAT Returns
- Corrections and Amendments
- HMRC VAT Assessments
- Missed Payments on Account
- Late payment penalties
- Late submission penalties
If interest is being applied to an amount which should be paid in installments, the interest will be charged on the outstanding balance until the tax has been paid in full.
Unfortunately, HMRC does not have an appeals process for late payment interest. However, you can object to the interest for a variety of reasons, such as, you believe HMRC has caused a mistake or there has been any unreasonable delay, you dispute the relevant date or effective date of payment, or you are questioning the legislation. It is important to note that interest objections can only be accepted if the tax relating to the interest has been fully paid. To discuss interest objections with HMRC, contact the VAT General Inquiries Helpline.
VAT Repayment Interest
On the other hand, if you are owed a VAT repayment from HMRC will also be applied. Like the late payment interest, the interest rate is dependent on the Bank of England’s base rate. It is calculated as the base rate minus 1%; the rate is currently 4.25%. Interest will not be applied on early payments or payments made in error (such as paying £2,500 instead of £250).
If the VAT has already been paid to HMRC, the repayment interest is calculated from the later date of either when the VAT was paid or the payment deadline for the period.
If the VAT has not been paid to HMRC, the repayment interest is calculated from the day after the later date of either the payment deadline or when the VAT was submitted.
HMRC will only pay repayment interest if there are no outstanding VAT returns. Because of this, the interest will only be paid from the date that all outstanding VAT returns are received.
The end date for the interest will be when HMRC repays the VAT, or it is set off against a different VAT return. It can also be set off against other types of tax you may owe.
If You Cannot Pay
If you are aware that you will not be able to pay your VAT in full by a deadline, call HMRC’s Payment Support Service for guidance. They have a specific line relating to VAT payments. One option they may propose is a payment plan. You can find out what you will be asked during the set up process, or if you can set up a payment plan online, here. Setting up a payment plan could lead to penalties being reduced.
HMRC offer a flexible plan known as a Time to Pay arrangement which will cover any penalties and interest that has been applied. If this arrangement is put in place before a penalty deadline, the penalties will not be applied. However, if you do not adhere to the conditions of the arrangement and it is cancelled, the penalties will be applied. You can find out more about Time to Pay here.
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