New VAT Penalties for Late Payment and Filing

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HMRC have introduced a new system of penalties for late filing and payment of VAT. These changes are designed to encourage businesses to comply with their VAT obligations in a timely manner.

The new system will apply to all VAT registered businesses, and it operates on a points basis, applying even if your returns are nil or you are due a VAT refund.

How does the late filing penalty points system work?

For every VAT return that you submit late, you’ll receive a late filing penalty point until you reach the late filing penalty point threshold.

The penalty point threshold is set by your accounting period. The threshold is the maximum points you can receive:

Accounting period	Penalty points threshold
Annually	2
Quarterly	4
Monthly	5

When you reach the threshold, you’ll receive a £200 penalty automatically. You’ll also receive a further £200 penalty for each subsequent late submission while you’re at the threshold.

For example, a business has submitted three quarterly VAT returns late already, once they submit their fourth late return, they will hit their threshold and be given an automatic £200 penalty. If they file their fifth VAT return on time, they do not receive another penalty, but remain at the 4 point threshold so that if the sixth return is also submitted late they will get another £200 automatic penalty.

The points will reset to nil if you submit your returns on or before the due date for your period of compliance and you make sure all outstanding VAT returns due for the previous two years have been submitted.

Late payment of VAT penalties

You’ll get a first late payment penalty if your payment is 16 or more days overdue.

When your payment is 31 or more days overdue, your first late payment penalty increases, and you get a second late payment penalty.

	First late payment penalty	Second late payment penalty
Payment up to 15 days overdue	No penalty	No penalty
Payment between 16 – 30 days overdue	Calculated at 2% on VAT owed at day 15	No penalty
Payment 31 days or more overdue	Calculated at: 2% on VAT owed at day 15 Plus 2% on VAT owed at day 30	Calculated at a daily rate of 4% per year on the outstanding balance, charged everyday from day 31 until the outstanding balance is paid in full

As well as penalties, interest is also charged on any overdue amounts. The interest charges will apply from the first day that the VAT payment is overdue and will continue to be charged until the outstanding VAT is paid in full, at an interest rate determined by the Bank of England base rate plus 2.5%.

All VAT registered businesses should already be complying with Making Tax Digital (MTD) for VAT, which means keeping VAT records in a digital format and using MTD-compatible software to submit VAT returns. Businesses who are not complying can be charged penalties by HMRC.

David Allen are professional accountants and tax advisors supporting individuals and businesses. For help and support on managing your VAT returns for your business and avoiding a late penalty charge, please contact our expert accountancy team.