Financial Secretary to the Treasury Lucy Frazer has announced that the new VAT penalties, which were to apply from 1st April 2022, will now be introduced from 1st January 2023.

The mandation of Making Tax Digital (MTD) for VAT for all VAT traders (those not subject to exemptions) was to be accompanied by two completely new penalty regimes; for late VAT payment and for late filing of VAT returns.

These new types of penalty will now apply from 1st January 2023.

Currently, the default surcharge system, which applies to late filing and late payment, is unique to VAT and can produce some very unfair results. One day of delay in paying VAT can produce a penalty of 15% of the unpaid amount.

The new late payment rules should be fairer, but they could hit small businesses much harder as there will be no easement where turnover is low.

The new regime for late payment

Under the new regime, there will be much more flexibility to allow for unintentional short payment delays. All businesses will get a 15-day grace period in which to pay their VAT bill, during which there will be no penalty at all. Also, if a time to pay agreement is reached the penalty clock will stop. The new regime will issue automatic penalties, with no warning messages or default periods (although this could change), when the VAT payment is late by:

  • 15 to 30 days – 2% penalty
  • Over 30 days – 4% of the late paid tax.
  • 31 days or more – daily penalties at 4% of the outstanding amount

In addition to the late payment penalty, the taxpayer will also be charged interest on any tax paid late at the rate of 2.5% plus the Bank of England base rate. This is in line with other taxes.

And late filing

The taxpayer will only be subject to a financial penalty for late filing if they have accrued sufficient points for being tardy with a certain number of VAT returns under MTD. The points threshold will depend on the submission frequency of the return:

Submission frequency Penalty threshold Period of compliance
Annual 2 points 24 months
Quarterly 4 points 12 months
Monthly 5 points 6 months

Under the “points means penalties” regime up to three quarterly VAT returns may be late with no penalty, but on the fourth late submission an automatic financial penalty of £200 is triggered. Also, every late submission after that threshold has been breached will trigger another £200 fine, but those additional penalties will not add points to the points slate.

The taxpayer will be able to appeal against all points and penalties awarded, and tax agents will probably be able to make appeals on behalf of their clients.

Each point will expire after two years, and this lifetime clock starts running from the month after the month in which the late filing occurred, not the month when HMRC tell the taxpayer the point has been levied.

HMRC has 11 weeks to levy points after the quarterly filing deadline is missed, 48 weeks for annual filings, and just two weeks for monthly filings.

The points slate can only be wiped clean when the taxpayer achieves both of:

  • No late submissions for a period of compliance; and
  • All returns filed for the previous 24 months, even if they have been filed late.

The period of compliance varies with the submission frequency of the return as shown in the table above.

Roll out to all MTD regimes

These new late payment and late filing penalty regimes are due to apply for taxpayers within MTD ITSA (Income Tax Self Assessment), from 6th April 2024. This includes the self-employed and landlords with total business or property income above £10,000 per year.

All other income tax payers who are in self-assessment are due to be subject to these new penalty regimes from 6th April 2025.