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Changes to the VAT Penalty Scheme

Changes to the VAT Penalty Scheme 

Did you know there are changes to the VAT Penalty scheme? 

HMRC has changed the VAT penalty system for periods starting on or after January 1, 2023. This applies to both submissions and payments. The way interest is charged also changed. These changes will affect everyone who submits VAT returns. Businesses must ensure their VAT returns are submitted and paid on time, or they may be subject to penalty points and charges. 

Missing the VAT submission deadline used to trigger an immediate penalty from HMRC. Now, the process is more complicated. You must account for three elements: 

  • penalty points for being late with filing. 
  • penalty charges for late payments 
  • interest charges for overdue payments 

Below is a thorough explanation of the changes to the VAT penalty scheme: 


How do late VAT submission penalty’s function? 

If you fail to submit your VAT returns on time, you will incur a points-based penalty. Every time you submit a late return, a penalty point will be added to your record up until you reach your penalty point threshold. At this point, you will have to pay a £200 fee. Then, for each following delayed submission, a supplementary £200 will be due. 


What are the limits for the VAT Penalty Points? 

The penalty point threshold sets the maximum points you can receive during an accounting period. 

  • Annually – 2 points 
  • Quarterly – 4 points 
  • Monthly – 5 points 


Quarterly Returns Penalty Example 

The company is required to submit their VAT Return every quarter. Due to 3 previous returns submitted late, they had accrued three penalty points, so when they submitted the next one late, they hit the threshold of 4 penalty points, resulting in a £200 penalty. The four penalty points remained when the following return was filed on time, but no additional penalty was incurred. However, the return after that was late, resulting in the same penalty threshold of 4 penalty points and an extra £200 fine. 


How do Changes to your business impact penalty points? 

Changing your accounting period 

If you have come to an understanding with HMRC about modifying your VAT return submission frequency, your threshold and penalty points will be readjusted.  

1. Acquiring a business 

 Taking ownership of a business with a valid Value Added Tax (VAT) registration will not come with any pre-existing penalty points. This remains true even if you transfer the previous owner’s VAT registration to yourself. 

2. Penalty Points and VAT Groups 

 When a different representative replaces the previous one in a VAT group, the new member is granted the same penalty points the original member had acquired. 

No changes in penalty points will be applied to a VAT group’s score if a person joins the group. The new member will not be affected even if they have penalty points. Similarly, the departing member will not take their points with them upon leaving the group. 

3. VAT Returns not impacted. 

 Late submission penalties do not apply to a newly VAT-registered business’ initial return. Additionally, when a company cancels its VAT registration, its final return is exempt, as are any one-time returns which do not span a month, quarter, or year. 


How do I Appeal a Penalty? 

If you receive a penalty point or £200 penalty from HMRC, you will be informed of this through a penalty decision letter. The letter will allow you to conduct a review with HMRC. Depending on the circumstances, you can appeal against the penalty or request a review at the tax tribunal to clarify how and when you can contest it. 


How do I view and dispute a penalty? 

One can access their VAT online account for penalty inquiries and initiate a review. For those who are unable to use the online account, they may also request a review via written communication to the provided address: 

 Solicitor’s Office and Legal Services, HMRC, BX9 1ZT 


How do Late payment penalties work? 

Payments of VAT that are not paid in full by their due date may incur late payment penalties, except for payments on account or instalments for an annual accounting scheme. Therefore, to avoid penalties, making payments as soon as possible is beneficial. An alternative option is to request a payment plan, which could reduce or eliminate penalties. 


What if I can’t pay my VAT on time? 

On the day you fail to pay, HMRC will begin charging interest for late payment. Therefore, it is crucial to reach out to HMRC immediately if you anticipate being unable to pay by the due date to avoid further penalty fees for the outstanding VAT. 


Can I pay in instalments? 

HMRC can provide you with a Time to Pay payment plan, resulting in lower or no late payment penalties. This arrangement can also incorporate all relevant fees, interest, and charges due. Please get in touch with the Payment Support Service for more information regarding your financial circumstances and to agree on the ideal monthly repayment amount. 


Are there ways to contest late payment penalties? 

In the event of receiving a penalty for late payment, HMRC will inform you of such in a penalty decision letter. This letter will include the opportunity to have a review conducted with HMRC. Furthermore, should you desire, you can also appeal the penalty to the tax tribunal. The penalty may be cancelled or amended if you possess a reasonable excuse. 


Outline of changes to the VAT Penalty scheme 

Pay within 16 days to avoid being subject to the first late payment penalty. If you wait any longer, exceeding 31 days, a second penalty will be applied on top of the first one. Should you not pay the due VAT within 16 and 30 days, you will incur a 2% penalty from the 15th day.         

If the payment is overdue by 31 days or more, a first penalty is incurred, calculated at 2% of the amount outstanding on day 15 and 2% of the amount still unpaid on day 30. The second late payment penalty is calculated daily at 4% per year on the outstanding balance, starting from day 31 until the total sum is settled in full. 


Are there any available examples of Late Payment Penalties? 

HRMC has a selection of webinars which provide a comprehensive look at the recent additions to VAT penalty and interest charges. They contain examples of scenarios where a late payment has occurred after the period of adjustment, and these can be accessed here: 


Is there an adjustment phase to the changes to the VAT Penalty scheme? 

To give you time to adapt to the modifications, HMRC is deferring any penalty fees for late payments until December 31, 2023. You either pay the total amount or establish a payment plan within 30 days of your payment due date. 

In the event of a breach of the Time to Pay agreement, HMRC will cancel the arrangement and assess both first and second late payment penalties as if they had never been set in place. 

For more information, visit the GOV.UK website 

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