The new penalty system for the late submission and payment of VAT returns impacts all VAT registered businesses.
Why has the system changed?
HMRC have introduced new penalties to harmonise the penalty systems for late submission and late payment.
What are the changes?
The current Default Surcharge is a combination of late submission and late payment penalties, the new system replaces this – creating two new distinct penalties.
- A point-based system for late submission; and
- A point-based system for late payment.
There have also been changes to VAT interest, bringing this in line with Income Tax Self Assessment (ITSA).
Late submission penalties
How do the penalties work?
The late submission penalties are calculated on a points-based system.
- For each late return, a penalty point will be received. This also applies to nil returns and repayment claim returns – previously the Default Surcharge system would not have applied to these returns;
- Once the penalty threshold has been met, a fixed penalty of £200 is issued; and
- A further £200 penalty is issued for each subsequent return while at the threshold.
Late payment penalties
The changes to late payment penalties means the sooner the VAT liability is paid, the lower the penalty rate will be.
What are the new penalties?
There are two new late payment penalties:
- First late payment penalty: calculated on amounts outstanding on day 15 and day 30; and
- Second late payment penalty: calculated on amounts outstanding from day 31 until the full amount is paid.
If the amount is paid in full or a payment plan is agreed up to 15 days after the payment due date, no late payment penalty will be issued.
This means if a trader is struggling to pay a VAT bill, they should submit their VAT return on time and then contact HMRC immediately to set up a Time to Pay arrangement – no payment penalty will then be issued. See our factsheet below for setting up a Time to Pay arrangement for VAT.
Late payment interest will be charged from the date the payment is overdue until the date the payment is paid in full.
How much are the penalties?
- If the amount is paid in full or a payment plan is agreed between 16-30 days after the due date: the penalty is calculated at 2% of the VAT owed at day 15.
- If the amount is paid in full or a payment plan is agreed on or after day 31: the penalty is calculated at 2% of the VAT owed at day 15 plus 2% of the VAT owed at day 30; and
- A second penalty will be issued.
Late payment interest
New interest changes bring VAT in line with the interest for other taxes.
Previously, no interest was charged on late payments for VAT returns. Now, interest starts to be calculated the day after the payment due date until the VAT is paid.
- The late payment interest rate is variable and is calculated at a rate of 2.5% plus the Bank of England base rate.; and
- Late payment interest also applies to late submission and late payment penalties, if they are paid after 30 days.