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UK VAT penalty regime reform 2023 launched

New penalties and interest regime for VAT return periods beginning 1 January 2023

The new UK VAT penalties regime for late returns and payments is now in place, with a system of penalty points that can build towards an eventual fines. This has replaced the VAT default surcharge which often resulted in disproportionate fines. The new system brings VAT into line with the regimes of other UK taxes. It had been delayed by one year due to IT implementation problems.

Simpler, fairer VAT fines

The UK’s HMRC has introduced a new Value Added Tax penalty and interest regime for late returns and payments. The aim of the reforms is to reduce penalties on taxpayers with a good compliance record compared to frequent offenders. It will also harmonise the rules between VAT and income tax self-assessment to make the entire regime more coherent.

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The new system replaced the existing single default surcharge on both late returns and penalties. This system can lead to disproportionate charges for returns in just a few days late, which has clogged up tribunal appeals for HMRC.  HMRC was looking to remedy these two problems. Our VAT Filer can accurately populate any UK VAT returns with verified data from our VAT Calculator or VAT Auditor services.

The new rules are divided as follows:

  • Late VAT return filing:

    A late return will result in a single penalty point being awarded. Once the accumulated number of late return penalty points is reached, a £200 fine is due. For most quarterly filers, this will be 4 penalty points; or 5 penalty points for monthly returns. They will role over for 24 months. A £200 penalty is levied when accumulated points are reached.

  • Late VAT due penalty

    Penalty based on amount and time payment is overdue. 2% penalties start after 15 days of overdue date. Then 4% after 30 days. At the same time, daily accrued interest will start after 30 days. At the same time, HMRC is obliged to pay interest on overdue refunds.

  • Late payment interest –

This is charged at 2.5% above the UK’s Bank of England base rate from the date the VAT is due.

Whilst a good and fairer system for most taxpayers who make the occasional error, the new system will lead to fast accumulating fines and interest for anyone in real cashflow difficulties, particularly after 30 days. It will be still possible to contact HMRC to strike a compromise agreement.

How new penalties work for VAT groups

If the representative member of a VAT group changes, any penalty points they’ve built-up are transferred to the new representative member.

The VAT groups’ penalty points total does not change if a person:

  • joins the group, even if the joining member had penalty points
  • leaves the group (the leaving member does not take points with them)


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