VAT: New penalties for late returns

Andrew Needham looks at the new penalty regime for late VAT returns. 

For periods starting after 1 January 2023, a new system of penalties will be introduced for late returns, replacing the existing system. 

A new points-based penalty regime has been introduced for late returns. Businesses will receive a point every time they miss a submission deadline. HMRC will notify them of each point. At a certain threshold of points, a financial penalty of £200 will be charged and the taxpayer will be notified. The threshold is determined by how often a taxpayer is required to make their submission. 

When a business has reached the relevant threshold, as determined by its submission frequency, a penalty will be charged for that failure and every subsequent failure to make a submission on time, but its points total will not increase. 

The penalty thresholds will be as follows: 

To prevent historic failures combining with occasional recent failures to cause a financial penalty, points will have a lifetime of two years, after which they will expire. This will be calculated from the month after the month in which the failure occurred. 

Points will not expire when a business is at the penalty threshold. This ensures they must achieve a period of compliance to reset their points. 

After a business has reached the penalty threshold, all the points accrued within that points total will be reset to zero when the business has met both the following conditions: 

• a period of compliance (that is, meeting all submission obligations on time for the period of compliance); and 

• the business has submitted all the submissions which were due within the preceding 24 months. It does not matter whether these submissions were initially late. 

Both requirements must be met before points can be reset. The periods of compliance are: 

If a business is at the penalty threshold and has achieved the period of compliance but has not submitted outstanding submissions, it will remain at the penalty threshold and continue to be charged penalties for any further failures to make submissions on time. 

However, HMRC has discretionary power not to levy a point or charge a penalty in relation to a business if they consider it appropriate to do so in the particular circumstances. Any use of this discretionary power by HMRC will be carefully considered and exercised in line with published guidance. However, where HMRC has already levied a point or penalty, taxpayers must use the reviews and appeals process to challenge this decision. 

There will be time limits after which a point cannot be levied. The time limits for levying a point depend on the business’s submission frequency and start from the day on which the failure occurred, as follows: 

The time limit for HMRC to assess a financial penalty will be two years after the failure which gave rise to the penalty. HMRC has discretionary power not to levy a point or charge a penalty in relation to an individual business or group of businesses if it considers it appropriate to do so in the particular circumstances.  

Practical tip. 

The new penalty regime is more complicated than the one it replaces, so businesses and advisers should familiarise themselves with the new regime to avoid incurring penalties.