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VAT Penalties 2023

New VAT penalties: January 2023 onwards

With effect from 1 January 2023, for VAT returns no longer reporting on periods pre-2023 the current VAT filing and payment penalty system is to be replaced by a new system. This involves the introduction of two separate penalties: one for late submission of VAT returns, and the other for late payment of VAT liabilities. The new system will be based on penalty points.


Late filing of VAT returns

The new penalty points system for late VAT returns is intended to be less punitive where you as a taxpayer miss the occasional deadline.

HMRC will allocate you one point each time you miss a VAT return filing deadline. Like driving licence points, points for late returns will expire (with conditions) after two years unless you reach the penalty thresholds.

When you have accrued the relevant number of points (see table below), a £200 penalty will be charged. All subsequent missed filing deadlines will also trigger a penalty.


Points for penalties

A penalty will be charged when your total equals these thresholds:

Annual VAT returns 2 points
Quarterly returns 4 points
Monthly returns 5 points


Resetting the points clock after a penalty

The penalty points that you accumulate will not automatically expire as normal once you have triggered a penalty. Instead, to reset the clock, you have to meet a longer test of good VAT filing compliance (i.e. submitting everything on time by the due date) for a specified period, and submitting any outstanding returns due in the prior 24 months.

The good compliance period will depend on your VAT return cycle: it will be 24 months for organisations filing annual returns, 12 months for quarterly returns and 6 months for monthly filings.


Late payment of VAT

The new penalty system will apply in two stages: fixed penalties and daily penalties. Essentially, the later the payment, the higher the rate of penalty charged.

Payments that are up to 15 days late (i.e. 15 days from the specified payment deadline) will not trigger a penalty.

Payments that are between 16 and 30 days late will trigger a penalty of 2% (that is, of the amount outstanding as unpaid at day 15).

Payments that are 31 days late or more will trigger a 2% penalty of the amount outstanding at day 15, plus an additional 2% penalty which is based on the amount outstanding at day 30 (i.e. a total of 4% if you have paid nothing).

From day 31, there will also be an additional daily penalty levied (calculated at 4% a year) on the amount outstanding.



Interest on overdue tax will continue to be calculated and charged from the due date. This will be at the Bank of England base rate plus 2.5%, and this will continue to accrue even where a time-to-pay arrangement has been agreed with HMRC.

Where a business has overpaid tax, interest on overpaid tax being repaid will be at Bank of England base rate less 1%.


Avoiding a penalty

The key way to avoid these new penalties is to file VAT returns and pay VAT liabilities on time.


Inability to pay

If you cannot pay your VAT liabilities, it is advisable to file your VAT return on time and contact HMRC to negotiate a time-to-pay agreement. If an instalment payment plan is agreed and put in place, the standard interest charges on late payments are frozen from that day and will not be enforced if you stick to the payment plan.


Light-touch approach

We understand that during 2023, HMRC is planning to apply a light touch when it comes to the first phase of penalties. This means that, where payment is made between 16 and 30 days after the due date, HMRC may waive the initial 2% penalty where you are seen to be doing your best to comply. This definition is not yet clear.


Late payment penalties

  Days after deadline Customer action Penalty position
  0-15 If you pay in full or arrange a payment plan on or between days 0 and 15 No late payment penalty charged
First penalty 16-30 inclusive If you pay in full, arrange a payment plan or part-pay on or up to day 30  First penalty calculated at 2% of what was outstanding at day 15 
First penalty 31 plus  If you pay in full or arrange a payment plan on or after day 31  First penalty calculated at 2% of what was outstanding at day 15 plus 2% of what is still outstanding at day 30
Second penalty 31 plus  Until you pay in full or arrange a payment plan A second penalty is calculated at a daily rate of 4% a year for the duration of outstanding balance and is calculated when the outstanding amount is paid


Period of familiarisation

HMRC is operating a period of familiarisation from 1 January 2023 to 31 December 2023 for everyone to get used to the new regime. During this period, it is waiving the ‘first penalty 16-30 days after deadline’ rule in the table above. Come 1 January 2024, it will come into effect.

Please get in touch if you need any assistance or would like to discuss this.


Claire Richmond
[email protected]