Delays to the Introduction of Penalties for Late Submission of VAT Returns

The government has announced it will delay the new penalty system by nine months.

Originally due to come into effect from the 1st April 2022, the new penalty system will now come into effect in January 2023.

Financial secretary to the Treasury, Lucy Frazer, said: “In Finance Act 2021, the government legislated to reform penalties for late submission and late payment of tax, initially from 1 April 2022, and to align interest charges for VAT with other major taxes.

Today, I am announcing that these changes for VAT businesses will now be introduced nine months later, on 1 January 2023.

HMRC is committed to becoming one of the most digitally advanced tax authorities in the world. The ambition and pace of change need to be balanced with well-tested systems and good customer service, particularly when businesses are facing additional challenges and uncertainty.

This extra time allows HMRC to ensure the IT changes necessary for the new penalties and interest charges can be introduced as effectively as possible, ensuring a high standard of service to customers.”

What will be changing?

Under the proposed changes, there will be a two-tier penalty system.

Late Submission Penalties

A late submission penalty will be issued as a single penalty point for a late submission of a VAT return. Once a business has exceeded a points threshold for multiple missed returns then a flat penalty of £200 will be imposed for each late return.

The penalty thresholds will be 2 points for annual submissions, 4 points for quarterly submissions, including MTD for ISTA, and 5 points for monthly submissions.

After 2 years, these points will expire.

Points will count towards each submission frequency and will not be held collectively to count towards a single penalty threshold.

Late Payment Penalties

Penalties for late payments will be imposed in a two-part penalty.

A charge will firstly be imposed at 2% of the outstanding tax if the tax due remains unpaid for 15 days past its due date.

After 30 days, this penalty will increase to 4% and be a daily penalty starting from 31 days until the business pays the tax that is due.

How long does HMRC have to issue a penalty?

The time limit will be two years after the failure that gave rise to the penalty.

What about Income Tax Self Assessment?

The new penalties will come into force for ITSA taxpayers who are required to submit digital quarterly updates from Making Tax Digital for ITSA until the tax year begins on the 6th April 2024. That is for taxpayers with businesses or property income over £10,000 per year.

For all other Self Assessment taxpayers it will start from the tax year beginning on the 6th April 2025.