Beware the new VAT late submission penalties

A new penalty regime was introduced for VAT from 1 January 2023. The new regime comprises late submission penalties and late payment penalties. Here we look at the penalty regime for late returns.

Late VAT returns

The late submission penalty regime kicks in whenever a VAT return is filed late. It applies regardless of whether VAT is owed to HMRC or whether the business is reclaiming VAT back from HMRC. For repayment traders this is a new concept as they have not previously had to worry about penalties for filing their VAT returns late.

Penalty points

The penalty regime works on a penalty point system. A VAT-registered business will receive a penalty point each time they file their VAT return late. Once the number of penalty points that they have been given reaches a certain level, the business will receive a financial penalty of £200.

The penalty threshold depends on how frequently the business files VAT returns. The thresholds are as follows:

• Annual returns: 2 penalty points.
• Quarterly returns: 4 penalty points.
• Monthly returns: 5 penalty points.

Penalty points have a lifetime of two years, after which they expire.

Once the penalty threshold has been reached and a penalty charged, the clock will only start again once the business has achieved a period of compliance. To do this, they must meet all submissions in their compliance period, which is 24 months for businesses filing annual VAT returns, 12 months for businesses filing quarterly returns and 6 months for businesses filing monthly returns. They must also have made all the submissions that were due for the preceding 24 months (regardless of whether the submissions were initially late). Once these tests have been met, the penalty points total is reset to zero.

HMRC have the discretion not to charge a penalty if they consider this to be appropriate. Time limits also apply during which penalty points must be levied, and points cannot be issued outside this window. The window runs from the date the return was due and is set at 48 weeks where VAT returns are submitted annually, at 11 weeks for quarterly returns and at 2 weeks for monthly returns. HMRC must also issue a financial penalty within two years of the failure that took the penalty points to the penalty threshold.