The government has announced that the new penalty system for late submissions of VAT returns, which was due to come into effect from 1 April 2022, will now be delayed by nine months, until January 2023.
Under the proposed changes, a new two-tier penalty system will be created in line with the existing penalties that already apply to tax returns.
Late submission penalty
Firstly, there will be a late submission penalty, which will see single penalty points issued for a late submission of a VAT return. If a business exceeds a points threshold by missing multiple returns, a flat penalty of £200 will be imposed for each late return thereon.
The penalty thresholds will be as follows:
| Submission frequency |
Penalty threshold |
| Annual |
2 points |
| Quarterly (including MTD for ITSA) |
4 points |
| Monthly |
5 points |
Points will have a lifetime of two years, after which they will expire.
Taxpayers will have a points total for each submission obligation they have, which is then split by the frequency of payment. If the taxpayer has more than one return with an annual submission frequency, this would still have a separate points total, so one point for each late submission.
Late payment penalty
Secondly, there will be late payment penalties, which will be charged in two parts.
The first charge will be imposed at 2% of the outstanding tax if the tax due on a return remains unpaid 15 days after its due date. If any of this tax is still unpaid after 30 days, the penalty increases to 4% of the tax still outstanding at that point.
The second charge is a daily penalty (set at 4% per year on the outstanding amount), which starts 31 days after its due date and continues until the business pays the tax that is due. Late payment interest (calculated at 2.5% above the Bank of England base rate) will be payable on any tax outstanding after the due date for a VAT return. Where a payment is made after the due date, late payment interest will be payable from the due date up until the date a full payment of that tax is received by HMRC. The time limit for HMRC to assess a financial penalty will be two years after the failure which gave rise to the penalty.
The penalty reform will come into effect as follows:
- VAT taxpayers for accounting periods beginning on or after 1 January 2023
- ITSA customers with business or property income over £10,000 per year (who are required to submit digital quarterly updates through Making Tax Digital for ITSA) from the tax year beginning 6 April 2024, and for all other ITSA customers from the tax year beginning 6 April 2025