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Now that Making Tax Digital (MTD) for VAT is in full effect for VAT registered business, HMRC are planning to introduce changes to the VAT penalty system. The new rules will bring the VAT penalties for late submission and late payment in line with income tax and Corporation Tax.

The new MTD for VAT penalty system will apply from January 2023, but there is an existing penalty scheme in place.

 
To make sure you don’t get caught out by the new rules (or forget about the current ones!), we’ll go through both. Brand new to VAT? Read our guide to VAT registration.

What is the current penalty for late VAT submissions and payments?

Until the new rules kick in from January 2023, HMRC will record a ‘default’ if you don’t submit your VAT return or pay your VAT bill on time before the deadline passes. The penalty (known as a surcharge) that you pay is a percentage of how much VAT you owe for that VAT period.

The surcharge penalty must be paid in addition to the VAT that you owe.

 
You won’t receive a penalty if it’s the first time that you default, but you may enter a 12-month surcharge period. This is a bit like being on probation, and defaulting again during the surcharge period will increase the rate of the penalty each time you default. Each default also extends the 12-month surcharge period by a further 12 months.

The amount depends on your annual turnover, and how many times you default.

 

How many times you default within 12 months Surcharge rate if your annual turnover is less than £150,000 Surcharge rate if annual turnover is £150,000 or more
1st No surcharge No surcharge
2nd No surcharge 2% (but no surcharge if this is less than £400)
3rd 2% (but no surcharge if this is less than £400) 5% (no surcharge if this is less than £400)
4th 5% (no surcharge if this is less than £400) 10% or £30 (whichever is more)
5th 10% or £30 (whichever is more) 15% or £30 (whichever is more)
6th 15% or £30 (whichever is more) 15% or £30 (whichever is more)

You can receive a VAT penalty for other reasons too:

 

Comprehensive VAT return service

From only £25.00 per month

Learn more

The VAT penalty points system from 1st January 2023

The current process will be replaced by a new points-based penalty system for VAT. It will apply to MTD VAT submissions for periods starting on or after 1st January 2023.

Late VAT submissions will accrue one penalty point each. If you receive enough points to reach the penalty threshold, you’ll be charged a £200 penalty.

VAT penalty points will have a 2-year lifetime before they expire.

 
The points threshold depends on how often you’re required to make submissions (which can depend on which VAT accounting scheme you are on).
 

How often do you make a VAT submission? How many points you will receive before reaching the penalty threshold
Annually 2 points
Quarterly 4 points
Monthly 5 points

Will I be fined if I’m late paying my MTD VAT bill?

The short answer is yes, from January 2023 HMRC will continue to fine taxpayers who don’t pay their VAT bill on time, as well as issuing penalties for not meeting the submission deadline. The penalty amount that you’ll be charged depends on how many days overdue you are paying the bill.

 

How many days after the due date you pay your VAT bill The penalty charge
0-15 days You will not receive a penalty
16-29 days 2% of the amount outstanding
30 days 2% of the tax outstanding at day 15, plus
2% of the tax outstanding at day 30
31 days or more 4 % of the amount owed, calculated daily until you pay the amount you owe

What if I can’t pay my VAT bill on time?

Whilst you won’t receive a penalty for the first 15 days after the payment deadline, it’s never a good idea to have a history of late payments on your account. Rather than risking non-compliance, contact HMRC’s Payment Support Service to make a ‘Time to Pay’ arrangement.

The Time to Pay scheme allows you to agree an instalment plan with HMRC, taking into account other bills and spending you need to consider each month.

Learn more about our online accounting services for VAT, contact the team for a chat on 020 3355 4047, or get an instant online quote.

About The Author

Dean Salmon

I'm an AAT and ACA qualified Chartered Accountant with over 13 years experience working with businesses, contractors and sole traders. I also love watching live music, and quizzes! Learn more about Dean.

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