HMRC's VAT penalty regime: VAT point system explained

On the 1st of January 2023, HMRC introduced a new VAT penalty system, which aims to deter people from filing late VAT submissions by imposing financial penalties for missed deadlines. The rate at which these penalties are charged depends on a number of factors such as deadline dates for VAT submissions, the amount of times a payment is missed, and the number of penalty points accrued over a certain period of time.

In this blog, we discuss how this penalty system works, including key dates, amounts for fines, and more.

Penalties for late VAT submission and payment

VAT penalties are based on a points system, with points being assigned whenever a VAT return is not filed on time. Once a certain number of points have been accrued, referred to as the penalty threshold, a fine will be incurred and you will be expected to pay a minimum of £200 after the first penalty instance.

Further missed submissions will also incur a £200 penalty for each instance. However, a single point on your file will not mean an instant fine, and most penalty points expire after around 2 years provided the threshold is not reached.

Penalties for submitting your VAT return late

There are different penalty thresholds for each available accounting period. These are:

The penalty thresholds are adjusted depending on the frequency of your VAT return submissions, and once the relevant threshold is reached you will be subject to an initial £200 fine, with further fines incurred for each payment date missed past your threshold.

Example of a late submission penalty

If your company submits their VAT returns quarterly, you can miss up to 3 return deadlines without incurring a fine, however you will accrue 3 penalty points. If you miss a 4th deadline, then you will have reached your company’s VAT penalty threshold and receive a £200 fine, and failing to meet the next deadline will instantly trigger a further £200 fine.

As with any type of financial penalty, these fines are designed to encourage businesses to implement better VAT return processes and ensure they meet national deadlines each year.

If your business frequently misses VAT deadlines, this may indicate that you need to implement better processes for dealing with VAT returns in a timely manner. This may include hiring an experienced accountant to help with the financial growth and legal compliance of your company.

How do I get rid of VAT penalty points? Can I reset VAT penalty points?

There are a number of ways you can get rid of VAT penalty points depending on how they were gained. If you gain penalty points but do not reach the threshold, then your points will expire after 2 years on either:

• The last day of the month, 25 months after penalty points were applied. This is only if your VAT deadline was originally on the last day of the month.

• The last day of the month, 24 months after penalty points were applied. This is if your original VAT deadline was before the last day of the month.

The above only applies for points accrued below the points threshold. If you have exceeded your points threshold and incurred a fine, then you must prove to HMRC you are able to pay VAT on-time over what is known as the ‘good compliance period’.

The length of your good compliance period is dependent on your VAT return frequency. In order to show good compliance, you must meet all of your VAT return deadlines for the following periods:

• 6 months for monthly VAT returns.

• 12 months for quarterly VAT returns.

• 24 months for annual VAT returns.

In addition to the above compliance periods, you must also submit any other outstanding VAT returns for the previous 24 months.

Penalties for late VAT payments

Penalties for late VAT payments have also been updated with the new regulations, introducing a percentage based penalty system rather than fixed penalty amounts like those introduced with the VAT return penalty system. We breakdown late payment penalties below:

It is important to understand the distinction between submitting a late VAT return and submitting a late VAT payment, as these will incur two different types of penalties, which will likely compound the issue if you are facing financial difficulty.

Help your business avoid late payment penalties by simplifying your VAT process with Quickbooks’ professional VAT software.

Example of a late payment penalty

Our example company, AB Ltd., has a VAT bill totalling £10,000 that was due on the 1st of January, however, the company fails to pay this amount on time. The first instance of late payment does not incur a penalty, however, they also fail to pay the amount owed within the 15-day deadline given to them after their first missing payment, thus incurring a penalty. Here is a breakdown of how these penalties work:

From the above example, let us imagine that AB Ltd. reaches 31+ days without making a VAT payment, then delays payment for an additional 13 months (31 January to 28 February the following year). This would be calculated in the following manner:

• Daily rate: (4% ÷ 365) = 0.01096%.

• Total penalty days: 397 days (31 January to 28 February the following year).

• Daily penalty: £10,000 × 0.01096% × 397 = £435.16.

Using this calculation, their total penalties owed would be:

• Fixed penalties: £200 (day 15) + £200 (day 30) = £400.

• Daily penalty: £435.16.

• Grand Total: £400 + £435.16 = £835.16.

In this example, we can see that the penalties for late payments can easily get out of hand the longer payment is delayed, and the more tax you owe the higher these amounts will become.

Submitting VAT returns and missing payments can lead to serious financial issues

As detailed above, missing VAT payment deadlines is a quick way to lose a lot of money through financial penalties. The reality is that, in most cases, late VAT payments are either down to financial trouble within a business, or a lack of proper financial administrative processes.

For many companies, particularly small businesses, when departments aren’t correctly staffed with experts or the business owner takes on the responsibility of a number of different departments, it can be easy for VAT submission and VAT payment deadlines to be missed. This will be further compounded depending on how much you owe in VAT payments, and the frequency of your VAT returns. For example:

Using the above example for late payments, let’s assume that AB Ltd. also submits monthly VAT returns. However, the company has missed 5 monthly submission deadlines and are now over the penalty point threshold. This means for each additional month they miss a submission deadline, they will incur further fines of £200 per missed deadline.

If AB Ltd. fails to make both their VAT payment and submit their VAT return on time for February, they will face the following:

• VAT Return Penalty: A £200 fine for missing the February submission deadline.

• VAT Payment Penalty: On top of the fixed penalties already calculated (£400 for the first and second penalties), the daily penalty of 4% per annum will continue to accrue until the outstanding amount is paid.

For example, if the company delays their VAT payment for another 6 months while continuing to miss submission deadlines, their penalties would include:

• 6 VAT submission fines: £200 × 6 = £1,200.

• Daily VAT payment penalty: Assuming the £10,000 owed remains unpaid, the daily penalty of £10,000 × 0.01096% will accrue for 182 days, adding approximately £199.50 in daily penalties.

This results in:

• Total VAT submission fines: £1,200.

• Total VAT payment penalties (fixed and daily): £400 (fixed penalties) + £199.50 = £599.50.

Combined total: £1,799.50 in penalties.

This example demonstrates how missing both VAT return and payment deadlines can quickly escalate financial issues. With mounting penalties, businesses can struggle to recover, especially if cash flow is already tight, which highlights the importance of staying on top of VAT obligations and putting robust systems in place to avoid these costly consequences.

How to avoid VAT penalties

One of the best ways to avoid penalties and missed deadlines is to prepare the required documents and evidence in advance, particularly by employing a professional accountant to handle your business finances.

Preparing your documentation also involves keeping an accurate record throughout the year, which can be made easier by moving towards compliance with Making Tax Digital, as digital records are easier to obtain and reference than paper records.

You could also keep an up-to-date calendar for financial commitments and make sure to align your business operations with this calendar. This way, you can help to avoid late submission or payment penalties.

Get VAT-prepared with QuickBooks

QuickBooks provides professional VAT software to help your business prepare for VAT returns, VAT payments, and Making Tax Digital compliance. With QuickBooks, you can take control of your business operations with easy-to-use, professional accounting software.

Explore our Plans & Pricing page to discover how QuickBooks can enhance your financial operations today.

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