New VAT penalty regime to start in January 2023

Published: 14th December 2022

There are a number of problems with the current VAT penalty system, the default surcharge. One is that a business paying just one day late can incur a seemingly disproportionate penalty of up to 15% of the VAT amount – there is no recognition of the severity of the lateness. Additionally, because the penalty is tax-geared, it doesn’t punish persistent late filers if they pay their VAT on time. From 1 January 2023, the VAT penalty system will be modernised. Filing a VAT return late will incur a penalty point. Once a business accrues a specified number of points (four for those filing quarterly returns), a £200 penalty will be issued. Further penalties will then be charged until the points reset to zero – which will only happen after a “period of compliance”, i.e. filing all returns on time. Further information about this can be read here.

For late payments, a separate system of charges will apply. As long as the VAT is paid in full between days one and 15, no penalty will be charged. Anything outstanding the day after that will incur a 2% penalty. If any VAT is still outstanding on day 31 it will incur a further 2% charge. Further lateness will attract a penalty at 4% on an annualised basis until the debt is settled. Note. A penalty can also be avoided by agreeing a time-to-pay arrangement before day 15 ends. A first-year concession will be in place, effectively extending the no-penalty period up to day 30.

It’s important to note that the new regime only applies to VAT periods starting on or after 1 January 2023. This means you may still be under the default surcharge rules for a VAT period ending on 31 January or 28 February, so make sure you pay your VAT on time if you have accrued defaults that haven’t cleared yet.