You must both file your VAT return and pay any VAT due by the due date to avoid penalties.
One thing we always encourage our clients to do is ensure their VAT is paid on time. When running your own business and with the various taxes involved, we always try to emphasise that filing your VAT returns on time and paying your VAT on time is the most important task when considering all your different business taxes and filings, including payroll filing and corporation tax filing.
VAT penalties are one area you want to do your best to avoid. In the past the HMRC would issue a surcharge liability notice, and the VAT default surcharge regime (along with its surcharge period) is being replaced by new penalties.
The vast majority of our clients are on a quarterly VAT filing cycle, and here we will look at the changes to the VAT penalty regime as it relates to quarterly VAT filing.
Quick Summary
The vast majority of our clients are on a quarterly VAT accounting period, so we’ll use that as a basis here.
Late Filing: If 3 VAT returns are filed late there is no penalty, however if the next VAT return is also filed late then the penalty point threshold is reached, and a £200 penalty will apply. It takes a long time to have these penalty points removed from your VAT account (see more below) so our best advice is to not get them in the first place.
Late Payment: You also get penalised if your VAT is not paid on time. HMRC will charge late payment interest from the first day that payment is overdue until it is paid in full. In addition to this if the payment is more than 15 days late you will also additional late payment penalties. See more below.
VAT Return Filing
As the name indicates, quarterly VAT registered clients need to file and pay their VAT every three months. The start and end date of each quarter varies across our client base and every month we have a new batch of the VAT registered clients who need their quarterly VAT filings to be prepared.
Let’s say we have a VAT registered client whose quarterly filing period ends on 31 Jan 2023. Regardless of the month, the VAT filing due date and payment date is always based off the last day of the filing period.
The filing deadline is one calendar month and seven days after the end of the accounting, so in this case the VAT return must be filed by 07 March 2023.
This is also the deadline for making payment to the HMRC.
We highly recommend that all of our clients set up a direct debit with the HMRC to ensure their VAT is always paid on time. It is simple to set up and is a real time saver, plus you get to hold onto your VAT money for a little longer. When a direct debit is set up your VAT payment will be collected automatically from your bank account three working days after the payment deadline on your VAT returns.
Changes to Late Filing Penalties
From 01 Jan 2023 the way VAT penalties are applied to late VAT filings have changed. The way late payment interest is charged has also changed.
Each time your VAT return is filed late you will receive a penalty point, and if you reach the penalty point threshold you will receive a £200 penalty. You will continue to receive a penalty for each subsequent VAT return that is filed late while you are still at the penalty point threshold.
The vast majority of our clients are on a quarterly VAT accounting period, and the penalty point threshold for quarterly filing is 4. So, in this case if 3 VAT returns are filed late there is no penalty, however if the next VAT return is filed late also then the penalty point threshold is reached, and a £200 penalty will apply.
There are rules around how the penalty point thresholds change if the VAT filing period changes, however it’s very rare for our clients to change their filing period so we will not cover it here.
Removing penalty points from your VAT account takes time. For example, if you have received say one penalty point so far it will not expire until 24 months after the deadline that the VAT return was due. So, it takes a long time for your penalty points to be cleared off your VAT record.
If you have reached the penalty point threshold and have received a £200 fine, then it is much faster to remove your penalty points. To do so, you need to meet two conditions;
A: complete one year of filing your returns on time (for quarterly VAT registered clients), submitting all returns by the deadline.
B: submit all outstanding returns for the previous 24 months.
Changes to Late Payment Penalties
From 01 Jan 2023 the HMRC will charge late payment interest from the first day that payment is overdue until it is paid in full, and in addition to this if the payment is more than 15 days late you will also face a late payment penalty.
The interest rate you will pay on these late VAT payments is calculated at the Bank of England base rate plus 2.5%.
If your VAT is not fully paid within 15 days, then late payment penalties will start to apply also. To avoid these VAT penalties, you must either pay your VAT in full or ask the HMRC for a Time to Pay arrangement. The penalty that you pay is it percentage of the outstanding amount.
If you make your VAT payment between 16 and 30 days overdue, the penalty you will pay is 2% of the VAT that was owed at day 15. This is called your first late payment penalty.
If your VAT payment is more than 31 days overdue, then your first late payment penalty increases by 2% of what was still outstanding at day 30. And a second late payment penalty is then introduced. This second late payment penalty is charged at 4% per year based on the outstanding balance from day 31 onwards and as calculated daily.
Avoid Late VAT Payment Penalties
For us the answer to this is simple. If you set up a direct debit so that the HMRC can collect your VAT payment directly from your bank account, you’ll never face late payment charges. Even if the HMRC face technical problems and cannot collect your payment on time, it’s not your fault and no VAT late payment charges will apply.
Repayment Interest
If your VAT return calculation results in a VAT refund and the HMRC is late in paying you, you will be due repayment interest on any VAT that you are owed. Note that from 01 Jan 2023, repayment interest replaces the repayment supplement.
Repayment interest is paid at the Bank of England base rate less 1%, with a minimum rate of 0.5%.