What are the Changes to the VAT Return Penalties?

(3 minutes to read)

HM Revenue & Customs have a new system in place which has changed the way in which penalties are applied for those who are late submitting and paying their VAT returns. Here we take a look at what you need to know.

What is VAT?

VAT – Value Added Tax – is an additional tax on anything you sell, whether this is services or goods.

The standard rate at which it is charged is set at 20%, however, there are some zero-rated VAT goods and services, such as food, fundraising, medical care and property licensing.

For more information, take a look at our What is VAT? page.

Do I have to register for VAT?

You will need to register for VAT if your total taxable turnover for the last 12 months is over the threshold of £85,000. It will also apply to your business if you expect your turnover to go over this threshold in the next 30 days.

Some businesses will choose to register for VAT even if their turnover doesn’t exceed £85,000 and that is because it can come with numerous benefits, which you can read all about on our A Contractor’s guide to VAT page.

VAT changes – Penalty points, penalties and interest

The new penalty system was introduced on the 1st of January 2023, with HMRC stating that the new penalties ‘will be fairer and more proportionate for businesses who submit their VAT returns or pay their VAT late’.

The way in which interest is charged is also changing.

Here’s a breakdown:

Late submission penalties
These will now work on a points-based system with each VAT return submitted late resulting in a penalty point. Once you reach the penalty point threshold, a £200 penalty will be issued.

A further £200 penalty will also apply for each subsequent late submission while at the threshold.

The threshold is set by your accounting period depending on whether you submit:

  • Annually (2 penalty points)
  • Quarterly (4 penalty points)
  • Monthly (5 penalty points)

Late payment penalties
A first late payment penalty will be issued for VAT payments that are more than 15 days overdue. After 30 days this penalty increases with a second late payment penalty added.

However, in order for businesses to get used to the new changes, HMRC will not charge a first late payment penalty on VAT payments due on or before the 31st of December 2023, as long as the amount due is paid in full or a payment plan is agreed within 30 days of the payment due date.

Late payment interest has been introduced, replacing previous VAT interest rules.

It is calculated at the Bank of England base rate, plus 2.5% and will be charged from the first day payment is overdue until it is paid in full.

Repayment interest has also been introduced, meaning that should HMRC owe you VAT amounts that you have overpaid and is late in doing so, you could be entitled to charge interest, which is calculated at the Bank of England base rate, minus 1%, with a minimum rate of 0.5%.

It’s worth noting that if you overpay in error, you won’t be able to claim interest – it’s only for repayment interest on overpayments that relate to an amount due to HMRC.

Payment plans
It is possible to set up a payment plan if you are worried that you can’t pay your VAT bill in full.

As long as it is set up and agreed by HMRC within 15 days of payment being due, a late payment penalty will not be issued.

Hopefully this page has answered some of your questions, but if you have any further queries, our team of experts are available to help, so give us a call on 01442 795 100 or email sophie.lewis@dolanaccountancy.com.

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Why Dolan Accountancy?

Dolan Accountancy was set up by Simon J Dolan, the man behind the well-known brand SJD Accountancy. With over 25 years experience in the contracting marketing, Dolan Accountancy has the heritage, reputation and credibility you can trust. Working closely with our sister company, Contractor Umbrella, it means we can offer one low cost, fixed fee package at £105 + VAT per month. This gives you the flexibility of using both our Limited Company Accountancy Services and our award winning Umbrella Service, for one inclusive cost. We don’t believe in tiered packages or hidden extra fees, instead we aim to give you everything you need, including:

  • Free Company Formation – This is where it all begins. Once you have decided on an available name, we will form your company free of charge (if using our accountancy services) and it will be ready for you to use in as little as three hours.
  • Free use of Contractor Umbrella – With changes in Public Sector IR35 Legislation we understand that sometimes you are required to contract via an umbrella company. We will keep your limited company ticking over, while you work margin free via our sister company, Contractor Umbrella.
  • A Dedicated Accountant – Your accountant will be there for any company or personal tax advice that you require. We will never outsource work, even to internal teams.
  • Free Access to FreeAgent – The founder behind the multi award winning FreeAgent platform was one of Simon’s first clients, therefore it only seems fitting that we offer all of our clients access to FreeAgent, free of charge.
  • Free Business Banking – We have decided to waive our commission so our clients can use Tide free of charge for the first year.
  • Unlimited IR35 Status Reviews – We will review all of your contracts for IR35 purposes and provide you with our professional opinion as to its status.
  • Free Registered and Director’s Service Office Address – Sometimes you just don’t want your home address on display at Companies House. When you sign up to our accountancy services, we will offer the use of our address as an alternative.
  • Your Business and Personal Taxation Needs – This includes Company Accounts, Director’s Personal Tax Return, VAT Returns, Payroll, Corporation Tax and Dividend advice, to name just a few.
  • Same day payments- We offer same day payments as standard providing funds are received into our account by 9am, for no additional fee.

If you’d like to find out more about how Dolan Accountancy can help you and your business, please give us a call on 01442 795100 or email sophie.lewis@dolanaccountancy.com or jaime.thorpe@dolanaccountancy.com.