Value-Added Tax (VAT) is a tax that’s charged on the sale of goods and services. It is added to most items sold by VAT-registered businesses.
VAT rates differ depending on the item that’s being sold. Most goods and services have a VAT rate of 20 per cent. However, some have 5 per cent, and some have no VAT at all. If you are a business owner, it is important that you have an understanding of VAT, as you may be required to add it to the price of your products or services and show the correct amount on receipts or invoices.
If you are required to charge VAT, you will need to submit regular VAT returns and make payments to HMRC. For most businesses, VAT will be due every three months. It is important to pay this on time, as HMRC issues penalties for missing the deadlines.
The government has, however, introduced some changes to VAT penalties and interest. This is so that people who miss the occasional deadline are not punished as harshly as those who frequently submit their returns and pay their VAT late. In this article, we’ll explore what these changes are.
If you miss a VAT return deadline or pay your VAT late, under the new penalty points system, you will receive a penalty instead of a default surcharge.
You will be allocated one penalty point each time you miss a VAT return deadline, and if you reach the threshold for your accounting period, you will be fined £200. If you are late making a VAT payment, you may have to pay a penalty. However, the sooner you pay, the lower the penalty amount will be. The way interest is calculated on late payments and repayments has also changed under the new system.
Continue reading to find out more about these changes.
When are the VAT deadlines?
The deadline for sending your VAT return depends on your accounting period. As mentioned, most businesses will need to submit a VAT return every three months, but for some, it will be monthly or annually.
The deadline for submitting your VAT return and paying VAT online is usually one month and seven days after the end of your accounting period. Remember to allow enough time for the payment to reach HMRC’s account by the deadline.
To find out exactly when your VAT returns are due, you can log into your VAT online account. If you use the VAT annual accounting scheme, you can also set up email reminders in your account.
It is important to note that if you are registered for VAT, you must submit a return by the deadline, even if you have no VAT to pay or claim back.
What happens if I submit a VAT return late?
Each time you miss the VAT return deadline for your accounting period, you will receive a penalty point. If you reach the threshold for your accounting period, you will have to pay a £200 penalty. While you are at the threshold, you will receive a further £200 penalty for each subsequent late submission.
The penalty point thresholds for each of the VAT accounting periods are as follows:
| Standard VAT accounting periods | Penalty point threshold |
| Monthly | 5 |
| Quarterly | 4 |
| Annually | 2 |
| Non-standard VAT accounting periods | Penalty point threshold |
| 8 weeks or less | 5 |
| Over 8 weeks and no more than 20 weeks | 4 |
| Over 20 weeks | 2 |
If you receive penalty points but don’t go over the threshold, your points will expire automatically. When a point expires depends on your VAT deadline. If it was the last day of the month, the point will expire on the last day of the month 25 months after this. If it was not the last day of the month, the point will expire on the last day of the month 24 months after this.
If you go over the penalty thresholds, to remove your points, you will need to submit everything on time for a specified compliance period and submit any outstanding returns due for the previous 24 months. The length of your compliance period depends on your accounting period:
| Accounting period | Compliance period |
| Monthly | 6 months |
| Quarterly | 12 months |
| Annually | 24 months |
Are any VAT returns not affected by the late submissions penalty?
Certain VAT returns do not incur penalty points. These are:
- The first VAT return for a newly VAT-registered business.
- The final VAT return after you cancel your VAT registration.
- One-off VAT returns that cover a period other than a month, a quarter or a year. An example of this would be a business owner who makes a one-off VAT return covering a four-month period because they’ve changed from quarterly to annual submissions.
What happens if I pay VAT late?
If you are late making a VAT payment, you may have to pay a penalty. The sooner you pay, the lower the penalty amount will be.
If your payment is overdue by 16 days or more, you will get a first late payment penalty. If your payment is overdue by 31 days or more, your first late penalty increases, and you will get a second late payment penalty.
The penalty amounts are calculated as follows:
| First late payment penalty | Second late payment penalty | |
| Payment overdue up to 15 days | N/A | N/A |
| Payment overdue between 16 and 30 days | Calculated at 2% on the amount you owe at day 15 | N/A |
| Payment overdue by 31 days or more | Calculated at 2% on the amount you owed at day 15, plus 2% of what is still outstanding at day 30 | Calculated at a daily rate of 4% per year on the outstanding balance, charged each day from day 31 until the balance is paid in full |
Provided you pay your VAT within 30 days of your payment due date, HMRC will not charge a first late payment penalty until after 31 December 2023. This is to give business owners time to get used to the changes.
What if I can’t pay VAT?
If you are struggling to pay the VAT you owe by the deadline for your accounting period, you should contact HMRC as soon as possible. They may agree to a payment plan, known as a Time to Pay arrangement, which allows you to pay in instalments and could mean lower or no penalty charges.
What interest rates will be charged for late VAT payments?
Interest on late payments and repayments is also calculated differently under the new system:
Late payment interest
HMRC will charge late payment interest from the first day your payment is overdue to the day your payment is made in full.
Late payment interest is calculated at the Bank of England base rate plus 2.5 per cent.
Repayment interest
If HMRC is late repaying any VAT you are owed, you may be entitled to repayment interest. This will be from the latest of either the day after the due date (if you’ve already paid the VAT) or the day after the VAT return deadline (if you have not already paid the VAT) until the day you are repaid in full. If you have any outstanding VAT returns, you will not receive repayment interest for those periods.
Repayment interest is calculated at the Bank of England base rate minus 1 per cent or at least 0.5 per cent if the repayment interest calculation results in a lower percentage.
It is worth noting that interest is also charged on the following:
- Late VAT returns
- Overdue VAT penalties
- Late Payment on Account (POA) instalments
- Voluntary disclosures where VAT is owed to HMRC
- Amounts due under HMRC assessments
How to appeal a penalty
HMRC will notify you of a penalty charge by sending you a letter. In this letter, they will offer you a review, which you can choose to accept if you disagree with their decision. (You can also request a review in your online account or by writing to HMRC at Solicitor’s Office and Legal Services, HMRC, BX9 1ZT.)
Alternatively, you can appeal to the tax tribunal. You can also appeal to the tax tribunal following a review if you are still not happy with HMRC’s decision.
If you can prove you have a reasonable excuse, your penalty may be amended or cancelled altogether.
How to avoid VAT penalties
The best way to avoid penalties is to submit your returns and make your VAT payments on time. However, if you are finding it difficult to make your VAT payments by the deadline, you should contact HMRC as soon as possible and ask for a Time to Pay arrangement.
To stop further late payment penalties, the timeframes for asking for a Time to Pay arrangement are as follows:
- If your VAT is between one and 15 days overdue — Ask for a Time to Pay on or between days one and 15 to avoid penalties that will apply from day 16
- If your VAT is between 16 and 30 days overdue — Ask for a Time to Pay on or up to day 30 to avoid higher penalties that will apply from day 31
- If your VAT is 31 or more days overdue — Ask for a Time to Pay on or after day 31 to stop your second late payment penalty and interest from increasing
Conclusion
On 1 January 2023, the government introduced a new penalty points system for late VAT returns and payments. Under the new rules, you will receive a penalty point each time you miss the VAT return deadline for your accounting period. If you reach the threshold for your accounting period, you will have to pay a £200 penalty. While you are at the threshold, you will receive a further £200 penalty for each subsequent late submission.
If you are late making a VAT payment, you may have to pay a penalty, but the sooner you pay, the lower the penalty amount will be. If your payment is overdue by 16 days or more, you will get a first late payment penalty. If your payment is overdue by 31 days or more, your first late penalty increases, and you will get a second late payment penalty.
Interest on late payments and repayments is also calculated differently under the new system. HMRC will charge late payment interest from the first day your payment is overdue to the day your payment is made in full, and it is calculated at the Bank of England base rate plus 2.5 per cent. If HMRC is late repaying any VAT you are owed, you may be entitled to repayment interest, which is calculated at the Bank of England base rate minus 1 per cent (but not less than 0.5 per cent).
The best way to avoid penalties is to submit your returns and make your VAT payments on time. If you are finding it difficult to make your VAT payments by the deadline, you should contact HMRC as soon as possible and ask for a Time to Pay arrangement.