HMRC Penalty Reform

I have a friend who is always late, and it drives me crazy. A group of us once missed curtains up at a West End show because of her tardiness; forced to wait until the first number had finished before taking our seats – we were furious! Why were we always being punished for Emma’s poor timekeeping? I am sure under its reforms, HMRC would have allowed me and my punctual friends to sneak in whilst Emma waited it out alone!

HMRC’s new penalty regime aims to make sanctions for failing to file or pay on time simple, fair, and effective. It will penalise the small minority who persistently miss the filing and payment deadlines (Emma) while being more lenient on those who make the occasional slip-up (me!).

New Penalties

When will the new penalties come into force?

From 1 January 2023, the default surcharge is being replaced with two new penalties: one for late submission and the other for late payment.

Late submission penalty

What is it?

The late submission penalty will be a points-based system. When you miss a submission deadline, you will incur one point. These points will accrue separately for different taxes. You will become liable to a fixed financial penalty of £200 only after you have reached the points threshold.

What is the points threshold?

The points threshold depends on your submission frequency, as shown in this table.

VAT return frequencyPoint threshold
Annual2
Quarterly4
Monthly5

Can I reset my points to zero?

Yes. Your total points can be reset to zero at any time once you have met the following two conditions:

Condition 1: You submit your returns, on or before the due date, for a set period as dictated by your VAT return frequency, as shown in this table.

VAT return frequencyPoint threshold
Annual24 Months
Quarterly12 Months
Monthly6 Months

Condition 2: All returns due within the preceding 24 months have been received.

What will happen if I continue to miss deadlines?

If you have reached your points threshold and continue to render late returns, you will incur additional fixed-rate penalties for each return.

Will repayment returns be affected by this new penalty?

Yes. Repayment and NIL returns will be subject to late submission penalty points and financial penalties.

How will I be notified?

You will receive a penalty notice. Any amounts shown as payable on the notice must be paid or appealed against within 30 days of that notice.

What should I do if I disagree?

In common with other tax penalties, you will not be liable for a point or penalty if you had a reasonable excuse for not making the relevant submission on time and will have a right to appeal against both points and penalties.

Late payment penalty

What is it?

This penalty will be based on how late you make the payment and may contain two charges.

What are the charges?

The first charge made in the event of a late payment will be as shown in the table below.

Days after payment due dateAction by taxpayerPenalty *
0 to 15Payments are made, or the taxpayer proposes a time to pay that is agreedNo penalty is payable
16 to 30Payments are made, or the taxpayer proposes a time to pay that is agreedThe penalty will be calculated at 2% of the VAT due
Day 31No payment made, no time to pay agreed2% of the VAT due at day 15, plus 2% of the VAT due at day 30

The second charge will apply from Day 31. You will receive a second penalty calculated at a daily rate of 4% per year for the duration of the outstanding balance. The charge is calculated when the outstanding balance is paid in full or time to pay is agreed.

Will the new penalties apply right away?

To give you time to get used to the changes, HMRC will not be charging a first late payment penalty for the first year from 1 January 2023 until 31 December 2023 if you pay in full within 30 days of your payment due date.

How will I be notified?

You will receive a penalty notice. Any amounts shown as payable on the notice must be paid or appealed within 30 days of that notice.

Will I be charged interest?

HMRC will charge late payment interest from the day your payment is overdue to when your payment is made in full. Late payment interest will be calculated as the Bank of England base rate plus 2.5%.

Can I get time to pay?

You can ask to agree on a time to pay for the first and second charges. If agreed with HMRC, the penalty will stop accruing from the date you propose it.

What should I do if I disagree?

In common with other tax penalties, you will not be liable for a penalty if you had a reasonable excuse for not making payment in time and will have a right to appeal if a penalty is imposed.

Don’t let your VAT queries lead to a late return, contact us about the VAT Helpline.

Ashley Little

Written by Ashley Little

Based in Glasgow, Ashley has 15 years’ experience in VAT, latterly as a regional lead for HMRC VAT officers and their managers. The role ensured consistency across the organisation and compliance with the law and internal procedures. She has worked with some of the UK’s best known large and mid-sized businesses and has provided tactical advice and overseen larger, more complex cases, including the successful defence of a multimillion-pound decision at First and Upper Tier Tribunals.

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