For VAT accounting periods starting on or after 1st January 2023, HMRC has introduced a new VAT penalties system for late submissions and late VAT payments. HMRC’s new approach to VAT interest charging for late payments has also been announced.

HMRC has recently announced a new VAT penalty and interest charging regime, effective from 1st January 2023 onwards.

The new measures include separate penalties for late submission of VAT returns and late payment of VAT. They also involve changes in the calculation of interest for late payments to HMRC.

Through these changes, HMRC intends to simplify how penalties and interest rates in VAT are issued and calculated.

While the changes involve less punitive measures for the occasional offenders, significant charges have been introduced for taxpayers who repeatedly fail to meet their VAT requirements. For example, a £200 penalty every time you miss a VAT filing once you have surpassed a points threshold.

Therefore, it is important that you submit and pay your VAT returns on time to evade costly penalties.

What are the new changes to VAT?

The VAT penalty reform involves major changes in three main areas including:

  • Late filing penalties
  • Late payments penalties
  • Interest charging where VAT is paid late

Late filing penalties

From 1st January 2023, penalties for late VAT return submissions will operate on a points-based system. The introduction of the new points system intends to distinguish the taxpayers that submit a late VAT return on occasion from those that regularly miss deadlines.

How does the new points system work?

For each VAT return you fail to submit on time, you will receive a penalty point. Your points will accumulate until you reach the points threshold.

Once you reach the points threshold, you will receive a £200 penalty. Following this, a further £200 penalty will be issued for each late submission you make after reaching the threshold.

It is important to note these points also apply for nil or repayment returns.

Points threshold for late VAT submissions

See below for details of the points thresholds based on the accounting period:

Accounting period Points threshold
Annually 2
Quarterly 4
Monthly 5

VAT Returns that are not affected

The late submission penalties do not apply to:

  • Your first VAT return if you are newly VAT registered.
  • Your final VAT return after you cancel your VAT registration, or
  • One-off returns that cover a period other than a month, quarter, or year.

Late payments penalties

Where VAT payments are paid late, a new late payment penalty applies. The penalty you will be charged depends on how long the payment has been overdue, with greater penalties for later payments. Late payment penalties will also apply to you even if your VAT return is filed on time.

There are two types of late payment penalties: first late penalties and second late penalties.

HMRC have also announced a ‘period of familiarisation’ to allow businesses to adjust to the new penalty system. This means that you will not be charged a first late VAT payment penalty until 2024, providing payments are paid in full within 30 days. Late payments that exceed 31 days will be subject to the full 4% charge in addition to the daily second late payment penalty.

The new penalties for late VAT payments are as follows:

  First late payment penalty Second late payment penalty
Payment up to 15 days overdue None None
Payment between 16 and 30 days overdue 2% on the VAT you owe on day 15. None
Payment 31 days or more overdue 2% of what was outstanding at day 15.


plus 2% of what is still outstanding at day 30.

a daily rate of 4% per year on the outstanding balance.


charged every day from day 31 until the outstanding balance is paid in full.

What is a Time-to-Pay arrangement?

If you are unable to pay your VAT payments on time, you can ask HMRC for a Time-to-Pay arrangement.

Requesting a Time-to-Pay (TTP) arrangement will stop or reduce the accrual of penalties from the date of the request. However, late payment interest will still accrue, and you must follow the approved agreement made with HMRC.

Failure to comply with a TTP arrangement may result in it being cancelled, and first and second late payment penalties being charged.

Interest for late VAT payments

From 1st January 2023, late payment interest will be charged from the day a VAT payment is overdue until the payment has been made in full.

Late payment interest (LPI) is calculated according to the Bank of England base rate plus 2.5%.

How PKF Smith Cooper can help

With new VAT penalties in place, it is imperative you understand and comply with your VAT obligations to avoid significant charges.

At PKF Smith Cooper, our team of experienced VAT accountants offer tailored financial advice and specialised support to ensure you meet your VAT requirements.

For more information on the new VAT penalty regime and how we can help you avoid them, get in touch with our VAT team today.