HMRC has overhauled the long-standing default surcharge regime for late payment of VAT. There will also be changes to the way in which HMRC calculate and charge interest on late payments of VAT.
The new arrangements will come into force in relation to VAT periods starting on or after 1 January 2023.
- A new penalty system for late payments of VAT will be introduced for everyone submitting VAT Returns for periods beginning on or after 1 January 2023.
- The new system imposes a 2% penalty for VAT payments not settled within 15 days of the due date. A further 2% penalty will be charged for unpaid VAT, 30 days following the due date. An annual penalty rate of 4% will apply to unpaid VAT liabilities thereafter.
- Penalties arise on the value of any unpaid VAT at the date the penalty charges are triggered. Therefore, making part payments may help to reduce the penalty charges.
- HMRC has implemented a ‘grace’ period such that businesses will not be charged a first late payment penalty for the first year from 1 January 2023 until 31 December 2023, if VAT is paid in full within 30 days of the payment due date.
- Interest charges have also been introduced on late VAT payments. Interest will be charged at a rate of 2.5% above the Bank of England base rate.
- HMRC will pay repayment interest on any VAT that businesses are owed which will be calculated from the day after the due date or the date of submission (whichever is later) and until the day HMRC pays the repayment VAT amount due in full. Repayment interest will be calculated as the Bank of England base rate minus 1% (within a minimum of 0.5%).
- The new interest and penalty regime will apply for periods beginning on or after 1 January 2023 so for businesses submitting quarterly VAT returns with period ends of January or February 2023, the old default surcharge regime will still apply for any late VAT payments in respect of these periods.
Example penalty calculation
A business owner is due to make a VAT payment of £250,000 for the VAT period ended 31 March 2023. The VAT return and payment is due on 7 May 2023 but the VAT payment is not made until 7 October 2023
Under the new penalty regime, the business will incur a late payment penalty of £13,333 (see below for calculations). Interest will also be levied based on a daily interest rate of 4.75% (current Bank of England base rate of 2.25% plus 2.5%) from the due date until the payment date. The new penalty and interest arrangements therefore give a big incentive to pay all tax owed as quickly as possible.
|Date of penalty
|Unpaid VAT (£)
|Penalty charge (£)
|22-May-23 (15 days from due date)_
|250,000 x 2%
|06-Jun-23 (30 days from due date)
|250,000 x 2%
|(250,000 x 4%) x (4/12)*
*The annual 4% penalty charge is applied on a pro-rata basis.
Top tips to help avoid/ reduce VAT late payment penalties
- The key to avoiding late payment penalties is to ensure that payments are made on time. The best way to ensure this is to arrange a direct debit payment to HMRC.
- Making part payments of the VAT liability can help to reduce the interest and penalty charges.
- Time to pay arrangements will ensure that penalties do not arise, but interest charges will still apply.
- The regime allows for penalties to be reduced or suspended where a business has a ‘reasonable excuse’ for making late payments. However, we expect that the scope of what is considered a ‘reasonable excuse’ will be much more stringent.
There is more…
HMRC has taken the overhaul of the VAT penalties regime a step further and has also implemented a new regime for late filings of VAT returns. The new penalty regime for late VAT return submissions will operate on a points-based system.
Any nil or repayment VAT returns received late will also be subject to late submission penalty points and financial penalties under the new system.
Stay tuned for the next post on VAT which will provide more details on the new regime.