New rules for VAT late payment and interest

January 2023 brings a fresh new year, new plans, and unfortunately new VAT penalties too.  In a complete change to the existing default surcharge rules, the new penalty and interest system will be in place for late VAT filing and payments from 1 January 2023.

The first taxpayers to be included in the new system are those in “stagger group one” (March, June, September and December returns) and those that file VAT monthly. The VAT that is due from periods starting before 1 January 2023 will still be included in the old default surcharge regime, no matter when it is paid.

First and Second Penalties

There are two separate late payment penalties. The first penalty has two parts:

  1. 2% of the VAT unpaid at day 15
  2. A further 2% of the VAT unpaid at day 30

If no payment is made until after day 30, the first penalty will be 4% of the amount due but if full payment is made between day 15 and 30, the first penalty is set at 2%.

From day 31 the second penalty comes into force and is charged daily on an annual rate of 4% of the amount owed.

As long as all outstanding VAT is paid within 15 days of the due date (or if a Time To Pay arrangement is requested in the same period), no late payment penalty is charged, only late payment interest.

Time To Pay (TTP)

If a TTP application is successful, the date of the request is taken as the date of payment so no penalty will arise. However, if the terms of the TTP arrangement aren’t upheld by the taxpayer, the first and second late payment penalties will be charged, even if just one TTP payment is missed.

Familiarisation Period

HMRC has declared a ‘period of familiarisation’ for the first year of the new system, whereby it will not charge the first part of the first penalty (2% at day 15) between 1 January and 31 December 2023. As long as payment is made within 30 days of the due date, only late payment interest will be charged.

We would always advise that clients pay their VAT on time and not be lulled into this ‘easy’ period, especially with interest rates rising fast, the penalties will be punitive.

Interest Charges

From 1 January 2023, late payment interest – set as the Bank of England rate plus 2.5% – is to be charged from the day the VAT payment becomes overdue until the day it is fully settled.

In addition to the interest rate changes on late payments, the repayment supplement will be withdrawn for periods on or after 1 January 2023 and be replaced with repayment interest which will accrue from the day after the due date or submission date (whichever is later) until the repayment is made. The repayment interest rate is set at the Bank of England base rate minus 1% – far lower than the rate for late payment interest.

Whilst there are some benefits to the new regime – like missing a payment by less than 15 days will not incur a penalty, other features may well catch taxpayers out – such as no repayment supplement and the penalties of missing a TTP payment.

As always, it’s well worthwhile speaking to the VAT experts at CRM for the best advice to plot your way forward with VAT. Contact the friendly approachable team on 01865 379272.

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