Late payment and submission of VAT returns and payment of interest

HMRC have announced that the current penalty regime relating to late submission and late payments of VAT returns will change in April 2022. HMRC have also announced changes to the payment of interest to and by HMRC.

Currently default surcharges are issued with increasing percentages for repeated late submissions and payments. The current default surcharges range from 2% to 15% of the VAT due to HMRC.

The changes will bring in a new point-based regime for the late submission of VAT returns, together with the payment of both a percentage of the unpaid VAT and late payment interest for late payments of VAT. HMRC claim that the new regime is intended to penalise only the small number of businesses/individuals who persistently miss their payment and submission deadlines.

In addition to the changes for the late submission and late payment of VAT returns, HMRC are introducing repayment interest to replace the repayment supplement, for late repayments of VAT.

How will the new penalty regime work?

There will be a points system in place for late submissions and a new penalty percentage and interest charge for late payments.

Late submissions – points system

Each time a business misses a submission deadline, HMRC will notify them that they have incurred a penalty point.

If the penalty threshold is reached, a financial penalty of £200 will be charged.

The penalty threshold depends on the submission frequency of the returns.

Submission frequencyPenalty threshold
Annual2 points
Quarterly4 points
Monthly5 points

The points will be in place for two years, after which they will expire.

However, if the points are at the penalty threshold, a period of compliance must be shown before the points are reduced to zero.

Late payments – new penalty percentages

The penalty percentage charged on the outstanding VAT/tax due to HMRC depends on the time elapsed between the payment due date and payment made.

Number of days after payment due datePenalty percentage
0 to 15 daysNo penalty
16 days to 30 days2%
Day 312% of what was due at day 15, plus 2% of what was due at day 30
Second chargeA penalty of 4% per annum is calculated on a daily basis on the unpaid VAT/tax from day 31.

Interest on late payments and repayments

For accounting periods starting after April 2022, if a payment is made to HMRC after the due date, late payment interest will apply. We assume that the current rate of 2.60% will be applicable, subject to any revisions before April 2022.

HMRC will also stop issuing repayment supplements and instead repayment interest will be payable providing there are no outstanding returns for other accounting periods or if security has been requested and not provided.

Light Touch Approach by HMRC

HMRC have stated that it will have a light-touch approach in the first year of operation.

In the first year, where a business is doing its best to comply, HMRC will not assess the first penalty at 2% after 15 days, allowing businesses 30 days to pay or approach HMRC and agree time to pay before HMRC charges a penalty.

If any VAT is still outstanding at 30 days, the first penalty will be charged at 2% of the outstanding amount at day 15 plus 2% of the outstanding amount at day 30. In most instances this will amount to a 4% charge at day 30.

In addition, if HMRC is satisfied a business has a reasonable excuse it will agree not to charge the penalty.

When will the change happen?

For late submission and late payment, the changes will apply to accounting periods beginning on or after 1 April 2022. For interest, the changes will apply to accounting periods beginning after April 2022.

Businesses will have the opportunity to challenge HMRC on receipt of a point or penalty using the usual review and appeals process.

We will continue to publish information and guidance as the deadline for the changes approaches.

How can MHA Moore & Smalley help?

If you need assistance with any VAT related issues, please don’t hesitate to get in touch and contact our team below.