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United Kingdom

High Importance: UK Penalty and Surcharges

As 2023 approaches, many companies and tax authorities worldwide are preparing for changes in rules and regulations. The UK has some important taxation updates, too. From January 2023, a new penalty and surcharges system will be launched on late VAT returns and payments. The highlight of the update is the increase in the probability of receiving penalties from the HMRC — even when the VAT amount due is zero.

The most important characteristic of the new system is that it will be points-based, meaning that companies will receive points for late returns and payments. Once enough points are collected, the company will get a penalty. Two separate penalty and surcharge regimes will replace the current default surcharge.

When VAT return is submitted late

Each missed report submission deadline will result in a penalty point. Companies will have varying penalty thresholds based on their assigned reporting frequency. For example, for companies submitting their VAT returns annually, the penalty threshold will be 2 points in 24 months. Those who report quarterly — 4 points (12-month compliance period), and monthly — 5 points (6-month compliance period)

Once the point threshold is reached, a first £200 penalty will incur, with an additional £200 penalty for each late submission after that.

When the VAT payment deadline is missed

The penalty for late payments will depend on the duration of time passed from the missed deadline. For example, if a payment is up to 15 days overdue, no penalty incurs, and a payment plan can be coordinated with the HMRC in order to ensure further compliance. If the payment is 16-30 days overdue, the initial penalty will be 2% on the amount due, and the option to agree on a payment plan with the HMRC will still be on the table.

If more than 30 days overdue, the penalty will consist of two parts. The first one will include 2% the VAT owed at day 15 and 2% on the VAT you owe at day 30. The second one — 4% yearly rate of the VAT you owe, counted daily with the formula of VAT owed * 4% / 365 * number of days overdue.

This penalty will be calculated once a payment plan is confirmed or the outstanding sum is paid in full. It is important to note that an additional late payment interest will be charged. This rate will consist of the Bank of England base rate and an additional 2.5%.

Based on the previous regime, no penalties were due in cases of late VAT returns, and late payments would evoke a default on the company’s account with a surcharge period when interest rates would be applied based on the missed payment and the number of deadlines missed. Penalties were only used in less frequent scenarios of faulty returns or wrong methods of VAT submission.

A transition period for the new system will last throughout 2023. During this year, the first payment penalty will not be charged if the VAT amount is paid in the first month after the deadline.

Do you need more information about the new system? 1stopVAT’s team is here to help.