VAT collection: penalties and interest
In January 2023, HMRC introduced a new points-based penalty system for late VAT submissions.
In January 2023, HMRC introduced a new points-based penalty system for late VAT submissions.
The new system penalises VAT-registered businesses for late returns in a similar way as points incurred for driving offences. Penalties can also be given for nil or repayment returns.
The intention, according to HMRC, is to make the system fairer for businesses who make a one-off mistake rather than offend repeatedly.
Any points received are added to a balance and if you reach the points threshold relevant to your business, you will receive a £200 penalty. There will be a further £200 penalty for each subsequent late submission if you remain at your threshold. (It is possible to remove penalty points to return under the threshold.)
Calculating your threshold
The threshold for your business will depend on your accounting period and is the maximum number of points you can receive before a penalty will apply.
| Accounting period | Penalty points threshold |
|---|---|
| Annually | 2 |
| Quarterly | 4 |
| Monthly | 5 |
Example
If a company submits quarterly VAT returns, its threshold is 4 points. If it has submitted 3 late returns already, it has 3 penalty points. Another late submission would mean it has reached its threshold of 4 points and is now liable for a penalty fine.
Different accounting periods
If your company uses a non-standard accounting period, different rules apply.
| Accounting period | Penalty points threshold | Rules that apply |
|---|---|---|
| Over 20 weeks | 2 | Annual |
| Over 8 weeks and no more than 20 weeks | 4 | Quarterly |
| 8 weeks or less | 5 | Monthly |
Exclusions
The penalty rules do not apply if:
- You are newly VAT registered and submitting your first VAT return.
- You have cancelled your VAT registration and submitting your final VAT return.
- You are submitting a one-off return for a period other than a month, quarter or year.
Removing points
If your business has not reached the threshold for penalty points, the points will expire automatically depending on your accounting period but generally around two years after the points have been received.
If your business has reached the threshold for penalty points, the points can only be removed by adhering to the rules for a ‘period of compliance’ (which is deemed by HMRC) AND submitting all returns for the previous 24 months.
Appealing a point or a penalty
You will be notified of receiving a point or a penalty by letter from HMRC which will also offer you a review to determine if the points or penalty can be removed.
You can also check any penalties and / or apply for a review in your VAT online account.
Interest
Interest is charged on late payments from the first day that the payment is overdue until the day it is paid in full. This is calculated at the Bank of England base rate plus 2.5%.
Please note, additional penalties are charged the longer the debt remains unpaid – up to 8% of the total unpaid sum.
For more information on VAT returns, please contact your Sandison Lang accountant.
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