It is crucial for businesses to stay informed about the significant updates to VAT penalties and submission requirements that took effect from January 1, 2023. These changes mark the introduction of a new penalty regime for late submissions and payments, the discontinuation of the Default Surcharge, and the unification of interest rules, including the introduction of Repayment Interest, which replaces the previous Repayment Supplement.
In this blog post, we’ll delve deeper into these updates and discuss how they might affect your business operations.
Overview of the New Penalty Regime
The revised penalties focus on both late submissions and late payments. Initially targeting VAT, these rules will extend to Income Tax Self-Assessment (ITSA) from 2024. Additionally, VAT interest rules have been adjusted to better align with those already in place for ITSA and Corporation Tax. The goal of these changes is to create a more equitable system that differentiates between occasional mistakes and deliberate non-compliance.
Under the new system, late payment penalties will vary depending on how quickly the payment is made, ensuring that penalties are proportional to the duration of the delay.
Important Dates for Businesses
| Date | Who is Affected | First Impacted Obligation |
| January 1, 2023 | VAT customers | Their first VAT return for an accounting period starting on or after January 1, 2023 |
| April 6, 2024 | ITSA customers with business or property income over £10,000 per year, required to submit returns via Making Tax Digital (MTD) | Their first tax year or accounting period starting on or after April 6, 2024 |
| April 6, 2025 | ITSA customers not mandated to submit returns via MTD | Their first tax year or accounting period starting on or after April 6, 2025 |
Late Submission Penalties: A New Points-Based System
The new points-based system applies uniformly to both VAT and ITSA. Each late submission earns a point, and once a taxpayer reaches a certain threshold, a fixed penalty of £200 will be imposed. For each subsequent late submission beyond this threshold, another £200 penalty will apply.
The penalty threshold varies based on how frequently submissions are made.
| Submission Frequency | Penalty Threshold |
| Annual | 2 points |
| Quarterly | 4 points |
| Monthly | 5 points |
Example – Quarterly VAT Return:
Consider a business that files VAT returns quarterly. If the return for the quarter ending April 30, 2023, is late (1 point), the following will occur:
- The July 31, 2023 return is on time (no additional points, still at 1 point).
- The October 31, 2023 and January 31, 2024 returns are both late (2 more points, now at 3 points).
- The April 30, 2024 return is late (4th point), triggering the first £200 penalty.
Each subsequent late return would incur an additional £200 penalty as long as the points remain above the threshold.
Resetting Penalty Points
If a taxpayer reaches the penalty threshold, they can reset their points to zero by meeting two conditions:
- Completing a compliance period by submitting all returns on time.
- Meeting the number of compliant returns required based on submission frequency.
Points will expire automatically after 24 months if the penalty threshold hasn’t been reached.
Late Payment Penalties: Gradual Escalation
The new late payment penalties are designed to encourage prompt payment. The penalties increase the longer the payment is overdue, with two distinct stages:
- First Penalty: Applied if payment is delayed beyond 15 days, calculated as 2% of the outstanding amount on day 15 and day 30.
- Second Penalty: Applies from day 31 onwards, calculated daily at a rate equivalent to 4% annual interest until the full amount is paid.
Transition Period
To help businesses adjust to these changes, HMRC will not enforce the first late payment penalty until after December 31, 2023, provided the payment is made or a payment plan is arranged within 30 days of the due date.
Interest on Late Payments and Repayments
Starting January 1, 2023, the interest rules for VAT were updated:
| Interest Type | Previous Rule | Current Rule |
| Late Payment Interest (LPI) | No interest charged on late VAT payments. | Interest is now charged at 2.5% plus the Bank of England base rate (currently 4%). |
| VAT Repayment Interest (RPI) | A 5% repayment supplement was applied if repayment was not made within 30 days. | Repayment Interest now applies, calculated at the Bank of England base rate minus 1% (with a minimum rate of 0.5%). This interest is payable from the day after the payment deadline or when the repayment return was submitted. |
Impact on Businesses
For businesses that occasionally submit late VAT returns or payments, the new system offers some relief, as minor delays will incur lower penalties and interest. However, businesses facing significant financial challenges, especially those struggling due to the cost-of-living crisis, may find the penalties and interest from prolonged delays to be particularly burdensome.
By staying informed and proactive, businesses can better navigate these changes and avoid potential pitfalls.