HMRC changes to VAT penalties and interest charges comes into effect 1st January 2023

For VAT periods starting on or after 1^st January 2023, the default surcharge fee for filing late VAT returns has been replaced with a new penalties system.  Note nil or repayment returns will also need to be filed on time to avoid incurring penalties.

What happens if you submit your VAT return late

Late submission penalties will work on a points-based system. For each VAT return you submit late you will receive one late submission penalty point.

Once a penalty threshold is reached, you will receive a £200 penalty and a further £200 penalty for each subsequent late submission.

The late submission penalty points threshold will vary according to your submission frequency:

You will be able to reset your points back to zero if you:

• submit your returns on or before the due date for your period of compliance — this will be based on your submission frequency as shown in the above table:
• make sure all outstanding returns due for the previous 24 months have been received by HMRC

How will late payment penalties be calculated?

Up to 15 days overdue

You will not be charged a penalty if you pay the VAT you owe in full or agree a payment plan up to 15 days after your payment was due.

Between 16 and 30 days overdue

You will receive a first penalty calculated at 2% on the VAT you owe at day 15 if you pay in full or agree a payment plan on or between days 16 and 30.

 31 days or more overdue

From this point on, the penalty will be calculated on a daily rate of 4% per year for the duration of the outstanding balance. This will be calculated when the outstanding balance is paid in full or a payment plan it agreed.

How late payment interest will be charged

HMRC will charge late payment interest from the day your payment is overdue to the day your payment is made in full.

Late payment interest is calculated as the Bank of England base rate plus 2.5%.

How late repayment interest will be calculated

HMRC will pay interest on refunds of VAT based on the latest of the due date or date of submission until the repayment date. The rate will be the Bank of England base rate minus 1%, with a minimum rate of 0.5%.

 Whilst these new penalties and charges come into effect from the first return after 1^st January 2023, in order to give you time to get used to the changes, they will not be charging a first late payment penalty during the year to 31^st December 2023, if you pay in full within 30 days of your payment due date.

As a business, if you are struggling with making your VAT payment, contact HMRC at the earliest opportunity to enquire about a payment plan and avoid these penalties and charges.

When should you register for VAT?

You are required to register your business for VAT with HM Revenue and Customs (HMRC) if: 

• your total VAT taxable turnover (your sales) over the last 12 months was over £85,000, the current threshold for 2022/23 tax year 

• you expect your turnover to go over £85,000 in the next 30 days

 You have 30 days from the end of the month you go over the threshold to register for VAT.

 Your effective date of registration is the first day of the second month after you go over the threshold.

 From your effective date of registration, you must: 

• Charge the right amount of VAT
• Pay any VAT due to HMRC
• Submit VAT Returns
• Keep VAT records and a VAT account

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 Value Added Tax (VAT) is charged on the majority of goods and services provided by VAT-registered businesses in the UK. It also applies to certain goods and services imported into the UK from the EU and non-EU countries.

As a business owner it is your responsibility to keep track of your turnover (sales) over a consecutive 12-month period, not over the 12 months of your financial year. Remember, if you are getting close to the VAT threshold you must register within 30 days of reaching the current threshold of £85,000 (2022/23 tax year).

When making this calculation any sales which are zero rated need to be included in your calculation to identify if you have reached the threshold for VAT registration. The only rate of VAT you ignore are VAT exempt sales.

When you register for VAT, it is your responsibility as the business owner to apply the correct rate of VAT on the sales you make. For the majority of businesses, it will be 20% (the standard rate at 2022-23). However, for example, in the hospitality industry the rate of VAT to be charged varies depending on what is being sold and where it is to be eaten, (eat in or takeaway, hot and cold food). It is therefore vital for business owners in this industry to fully understand the VAT rates for the food and drink they sell.

HMRC have provided guidance on VAT rates for different goods and services, and this can be found using the following link: VAT rates on different goods and services – GOV.UK (www.gov.uk)

Many small businesses with a turnover below the VAT threshold volunteer to register for VAT as they deem it to be advantageous:

• VAT can be reclaimed on goods and services purchased from other businesses.
• If their customers are VAT registered, they will be able to reclaim the VAT, which may give them an advantage over a non-VAT registered business
• Voluntary registration can be backdated by up to four years, which will allow VAT to be claimed back on equipment and set up costs if you still have those items and can provide the invoices/receipts.

Late Registration

If you register late, you must:

• pay VAT on the sales you have made since the date you should have registered AND
• you may need to pay a penalty depending on how much you and how late your registration is.

VAT is not a one size fits all and there are too many variables to cover in this blog.

The most important thing to do if you are not VAT registered, is keep track of your sales over the last 12 months and if you are creeping up on the VAT threshold, take advice from a qualified bookkeeper or accountant.