Many small business owners may not be aware that from 1 January 2023, a new penalty regime came into force from HMRC on late submission and payment of your VAT bill, which replaces the previous more lenient penalty regime. If you are not aware of the changes, keep reading.

How to avoid penalties

To avoid penalties, you must:

Submit your VAT returns on time using Making Tax Digital (MTD) compliant software. more information can be found here.
Pay your VAT on time. VAT bills come round quickly. At the end of each VAT quarter-end, you have 5 weeks to prepare, submit and pay your VAT return, hence the importance of keeping good records day to day is essential. You can also set-up a direct debit to pay your VAT on your business bank account via your business government gateway.

What happens if you submit a VAT return late?

From 1st January 2023, the new VAT penalty regime is based on a points-based system.

One point is given for each VAT return submitted late. For each return you submit late, you’ll receive a penalty point until you reach the penalty point threshold.

If you are set-up to submit VAT returns quarterly, the penalty point threshold is 4 points.
If you are set-up to submit VAT returns annually, the penalty point threshold is 2 points.
If you are set-up to submit VAT returns monthly, the penalty point threshold is 5 points.

If you reach the threshold, you’ll receive a £200 penalty. You’ll also receive a further £200 penalty for each subsequent late submission while you’re at the threshold.

Can I remove penalty points from my VAT record?

If you’ve reached the penalty points threshold and have the maximum points allowed for your accounting period, you can only remove them by meeting both conditions below:

Complete a period of compliance, submitting all returns by the deadline.
Make sure all VAT returns are up-to-date for the previous 24 months.

If you receive a late submission penalty point or a £200 penalty, HMRC will tell you in a penalty decision letter. The letter will offer you a review with HMRC.

Find out how and when you can appeal against a penalty.

You can choose a review or appeal to the tax tribunal.

Your penalty may be cancelled or amended if you have a reasonable excuse.

What happens if you do not pay your VAT on time?

If your VAT payment is more than 15 days overdue, you’ll have to pay the first late payment penalty fee. If your VAT payment is more than 30 days overdue, you’ll also have to pay a second latest payment penalty.

See below table showing penalties levied depending on overdue date:

You will also be charged late payment interest from the day after your VAT is due to the day it is paid in full. Interest is calculated at the Bank of England base rate plus 2.5%. Learn more here.