Understanding the penalty point system for late VAT returns and payments

Since HMRC introduced the new VAT penalty regime in January 2023, businesses now face immediate consequences for late submissions and we’ve observed an increase in the strict enforcement of deadlines and payments. Our latest article provides an overview of the penalty point system for late VAT returns and payments to help contractors and freelancers understand the penalties they could face if they do not adhere to VAT return deadlines.

When is the VAT return deadline?

The deadline for submitting your VAT return is different for every company but is usually one calendar month and seven days after the end of your accounting period. You must also pay VAT to HMRC by this deadline. The accounting period is the period covered by the VAT return and is ordinarily three months in length, meaning most companies need to submit quarterly VAT returns.

A VAT return aims to let HMRC know how much VAT you’ve charged and how much VAT you’ve paid to other businesses. You must submit a VAT return to HMRC if you’ve registered for VAT – even if you have no VAT to reclaim or pay.

What is the penalty point system for late VAT returns and payments?

The penalty point system, introduced on the 1^st of January 2023, means you’ll receive separate penalties for submitting your return late and paying late.

Points for submission of late VAT returns

You’ll receive a penalty point for every VAT return you submit late (including nil returns). When you reach the penalty point threshold, you’ll get a £200 penalty. You’ll get a further £200 penalty for each subsequent late submission while you’re at the threshold. The threshold is the maximum points you can receive and is set by your accounting period:

Accounting period	Penalty points threshold
Annually	2
Quarterly	4
Monthly	5

How to remove late VAT submission penalty points?

If you’ve reached the threshold for late submission penalty points, to remove all points and avoid further £200 penalties, you’ll need to complete a period of compliance by submitting all returns by the deadline. You also need to submit all outstanding returns for the previous 24 months.

If you have yet to reach the threshold for penalty points for your accounting period, these individual points will automatically expire. However, you are advised to take action to avoid accumulating more. Please visit the government’s website for information on when penalty points expire.

What are the penalties for late VAT payments?

If you make a late VAT payment, you could receive a penalty. How much you pay will depend on how late your payment is. You could receive a penalty if you pay late:

On your VAT return
Following an amendment to a return or correction
From a VAT assessment HMRC issued when you did not submit a return
From a VAT assessment HMRC issued for another reason

When your payment is 31 or more days overdue, your first late payment penalty increases, and you get a second late payment penalty. You’ll also be charged late payment interest from the first day your payment is overdue until you pay in full. The late payment penalties are outlined in the table below:

	First late payment penalty	Second late payment penalty
Payment up to 15 days overdue	None	None
Payment between 16 and 30 days overdue	Calculated at 2% on the VAT you owe at day 15	None
Payment 31 days or more overdue	Calculated at: · 2% of what was outstanding at day 15 · Plus 2% of what is still outstanding at day 30	Calculated at: · A daily rate of 4% per year on the outstanding balance · Charged every day from day 31 until the outstanding balance is paid in full

You should pay in full or ask for a Time to Pay arrangement to avoid further penalties.

Are the rules different if your accounting period started on or before the 31^st of December 2022?

The rules are different if your accounting period started on or before the 31st of December 2022. Instead of the penalty point system, HMRC will record a ‘default’ on your account and may put you in a ‘surcharge period’ of 12 months if you’re late submitting a VAT return or payment. You do not pay a surcharge when you receive a default for the first time. However, you might have to pay more in addition to the VAT you owe if you receive another default within the 12-month.

What is a surcharge period?

If you are late submitting a payment and your turnover is £150,000 or more, you will be subject to a 12-month surcharge period.

If you submit a payment late twice in 12 months and your turnover is under £150,000, you will also be given a 12-month surcharge period.

What happens if you submit a return or payment late during a surcharge period?

Your 12-month surcharge period will restart if you submit a return late. If you submit a payment late, the 12-month surcharge will restart, and you may be required to pay a surcharge.

How much surcharge will you pay?

The surcharge is a percentage of the outstanding VAT for the period in default and is calculated on the due date. There is no penalty for a late zero return. You will be subject to the following if you default during a surcharge period:

Defaults within 12 months	Surcharge if annual turnover is less than £150,000	Surcharge if annual turnover is £150,000 or more
2^nd	No surcharge	2% (no surcharge if this is less than £400)
3^rd	2% (no surcharge if this is less than £400)	5% (no surcharge if this is less than £400)
4^th	5% (no surcharge if this is less than £400)	10% or £30 (whichever is more)
5^th	10% or £30 (whichever is more)	15% or £30 (whichever is more)
6 or more	15% or £30 (whichever is more)	15% or £30 (whichever is more)

Are you looking for an FCSA-accredited accountant?

Are you looking for an FCSA-accredited contractor accountant? Look no further than Bluebird Accountancy. Bluebird Accountancy is accredited by the FCSA – the UK’s leading professional body committed to ensuring the supply chain of temporary workers complies with HMRC’s rules and regulations. To obtain accreditation, we’ve proven we adhere to the highest compliance standards outlined in the FCSA’s Codes of Compliance.

Our dedicated contractor accountancy service was created with the needs of modern-day contractors and freelancers like you in mind. When you register with the service, you will be given access to your own FreeAgent account. This makes it simple for contractors to manage their own accountancy and bookkeeping, all with the support of our expert team, who can provide tailored tax planning and advice based on your business goals and requirements.

If you are considering setting up a limited company or would like to discuss our accountancy services, please call our expert Sales Consultants on 0808 301 2389 or request a tailored quote, and a member of the team will contact you.