VAT Penalties and Surcharges: The New Points System

The New Penalty Regime

From January 2023, HMRC replaced the old default surcharge system with two separate penalty regimes: one for late submission of VAT returns and one for late payment of VAT. Understanding both is essential for staying compliant.

Late Submission Penalties

The new system uses a points-based approach, similar to penalty points on a driving licence.

How Points Work

Each time you submit a VAT return late, you receive one penalty point. Once you reach a certain threshold, you receive a £200 penalty — and a further £200 for each subsequent late return.

The threshold depends on your submission frequency:

| Submission Frequency | Points Threshold | |---------------------|-----------------| | Annual | 2 points | | Quarterly | 4 points | | Monthly | 5 points |

Example for quarterly returns: Your first three late submissions each add a point but no financial penalty. Your fourth late submission takes you to the threshold — £200 penalty. Your fifth late submission (while at the threshold) — another £200. And so on.

Resetting Your Points

Points expire if you file on time for a period of good compliance:

| Submission Frequency | Good Compliance Period | |---------------------|----------------------| | Annual | 24 months | | Quarterly | 12 months | | Monthly | 6 months |

You must also have submitted all outstanding returns to reset your points.

Late Payment Penalties

Late payment penalties are calculated separately from late submission points.

Up to 15 Days Late

No penalty if you pay within 15 days of the due date.

16 to 30 Days Late

A penalty of 2% of the outstanding VAT is charged on day 16.

More Than 30 Days Late

An additional 2% of the outstanding amount is charged on day 31 (so 4% total). Plus, from day 31 onwards, a daily penalty accrues at an annualised rate of 4% until the debt is paid.

Example

You owe £10,000 VAT and pay 45 days late:

• Day 16 penalty: 2% x £10,000 = £200
• Day 31 penalty: 2% x £10,000 = £200
• Daily penalty (days 31-45 = 15 days): 4% x £10,000 / 365 x 15 = £16.44
• Total penalties: £416.44

Interest on Late Payments

In addition to penalties, HMRC charges interest on late VAT payments at the Bank of England base rate plus 2.5%. Interest runs from the day after the payment deadline until the payment is received.

Repayment Interest

If HMRC owes you a VAT refund and delays paying it, they pay you repayment interest at the Bank of England base rate minus 1% (with a minimum of 0%). This rate is lower than the late payment interest rate — HMRC pays less interest than it charges.

How to Avoid Penalties

1. File on time, every time. Even if you can't pay, submit the return. Late filing points accumulate separately from late payment penalties.

2. Set up a direct debit. HMRC's direct debit for VAT ensures payment is taken automatically shortly after the deadline.

3. Keep on top of your records. Last-minute scrambles to prepare returns lead to missed deadlines. With Accounted, your VAT return is continuously prepared as transactions are recorded.

4. Contact HMRC if you're struggling. If you genuinely can't pay, HMRC may agree a Time to Pay arrangement, which can prevent late payment penalties.

5. Use your MTD software's reminders. Accounted sends deadline reminders so you never forget.

Appealing Penalties

You can appeal a penalty if you have a reasonable excuse — circumstances beyond your control that prevented timely filing or payment. Examples include:

• Serious illness or bereavement
• HMRC system failures
• Fire, flood, or other disasters
• Unexpected postal delays (for the rare cases involving post)

A lack of funds is not a reasonable excuse for late payment, though it may be relevant when negotiating a Time to Pay arrangement.

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