VAT Penalties after 1 January 2023 - Changes for your practice to be aware of

For VAT return periods starting from 1 January 2023, there is a new penalty regime in place which has changed the basis of how penalties are charged by HMRC for late submission of VAT returns and late payment of VAT. This is an important change for dispensing practices to be aware& of as under the new penalty points system, penalties can be incurred even on nil and repayment returns.
 

Late VAT returns - Penalty points system

The new penalty points system for late VAT returns is intended to be less punitive for taxpayers where only the occasional deadline is missed. One point is allocated to the account each time a filing deadline is missed and when the relevant number of points is reached, a £200 penalty will be charged. After this, all missed deadlines will trigger an automatic penalty, unless the points have expired after the specified period has elapsed (see below).
 

Points for penalties

A penalty will be charged when your total equals 2 points for annual returns, four points for quarterly returns or five points for monthly returns.

However, a late return will not be subject to penalty points, where it is:

• The first VAT return if you are newly VAT registered
• The final VAT return after you cancel your VAT registration
• A one-off return that covers a period other than a month, quarter or year.
   

Resetting the points clock - no penalties

Provided the relevant points threshold to incur a penalty has not been reached, penalty points will expire after a period of two years. The expiry date is calculated with effect from the month after the one in which the late submission occurred.
 

Resetting the points clock - after a penalty

The penalty points that have built up will not automatically expire as detailed above once a penalty has been triggered. Instead, to reset all accrued penalty points to zero the taxpayer has to meet two specific criteria:

• Passing a 'test of good compliance' by submitting everything on time for a specified period (i.e. annual returns for 24 months, quarterly for 12 months or monthly for six months)
• Submitting any outstanding returns that were due in the prior 24 months.

If only one of the two above criteria have been met, the account remains at the penalty threshold and penalties will continue to be charged for any further late submissions.
 

Existing default surcharges

For VAT return periods where the starting date is before 1 January 2023, the Default Surcharge regime still applies and HMRC will issue and enforce penalties under that regime. However, for all return periods starting from 1 January 2023 or later, all businesses will begin with a 'clean slate' in respect of VAT late filing and payment penalties - there are no transitional arrangements.
 

Late payment of VAT

If a payment is owed on a VAT return and the payment is made late, the new penalty system applies in two stages - fixed penalties and daily penalties. Essentially the later the payment is made, the higher the rate of penalty which will be charged. For more information see our website at bit.ly/410aeDZ.
 

Help with your VAT

If you are facing a VAT penalty or would like to understand these or any other VAT issue in more detail, please get in touch with a member of our team.