Understanding the new VAT penalty regime

HMRC is introducing a new, fairer points-based penalty system for late submission of VAT returns, replacing the old default surcharge regime. This change aims to penalise persistent non-compliance rather than isolated mistakes.

Alongside this, the penalties for late payment are also changing, with charges escalating the longer the debt remains unpaid. Understanding these new rules is crucial for all VAT-registered businesses.

The points-based system for late submissions

Under the new system, you will receive one penalty point every time you miss a submission deadline. Once you reach a certain threshold of points, a financial penalty of £200 will be applied. The threshold depends on how frequently you submit returns: it is 4 points for annual returns, 5 points for quarterly returns, and 2 points for monthly returns.

Once you reach the threshold, every subsequent late submission will incur another £200 penalty. Points will expire after a period of compliance (e.g., 12 months for quarterly filers), provided all outstanding returns have been submitted.

Penalties for late payment

The late payment penalties are separate from submission penalties and are designed to encourage businesses to pay as quickly as possible or agree a 'Time to Pay' arrangement. No penalty is charged if the tax is paid within 15 days of the due date. A 2% penalty is charged on the tax outstanding at day 15. If the tax is still unpaid at day 30, the penalty increases to 4%.

From day 31 onwards, a second penalty is calculated daily at an annualised rate of 4% on the outstanding balance. This highlights the importance of contacting HMRC early if you are struggling to pay your VAT bill.