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Points-based regime introduced for late VAT filing

From 1 January 2023, a new late filing and late payment penalty regime will be rolled out for VAT returns.  In this article we will look at the late filing penalty regime and we will cover the late payment penalties in a separate article.

What’s changing and when?

The new penalties will replace the existing default surcharge rules for VAT periods starting on or after 1 January 2023.

The new regime will be points based with the taxpayer receiving a penalty point from HMRC every time a VAT return is filed late. Once the total number of penalty points reaches a certain threshold, a fixed financial penalty of £200 will be charged. 

The penalty points threshold depends on how regularly the return in question is filed:

Annual returns – 2 points

Quarterly returns – 4 points

Monthly returns – 5 points.

So, a taxpayer filing quarterly returns would have to file four returns late before incurring a penalty

Individual penalty points do however have a shelf life. Provided that the penalty threshold has not been reached, a point will automatically expire after 24 months.

Once a taxpayer hits the penalty threshold, individual points will no longer automatically expire, and each and every subsequent late filing will trigger a further £200 penalty. At this stage, the only way points can be removed, and further penalties avoided, is through a period of compliance.

Period of compliance

Once a taxpayer has reached the penalty threshold, the only way their points can be removed is through a period of compliance. When both of the following two conditions are met, the taxpayer’s points will then be reset to zero:

Each VAT return has been filed on or before its due date for a certain period of time (24 months for annual returns, 12 months for quarterly returns and six months for monthly returns).

All outstanding VAT returns due in the previous 24 months have been submitted.

Impact on taxpayers

Many may be glad to see the back of the default surcharge regime, and the potentially disproportionate penalties it can impose. Taxpayers will also start with a clean slate under the new regime, regardless of their current position – there is no mapping over from the default surcharge regime to the new points-based one. 

For the first time, however, late filing penalties will arise for returns where no VAT is due. This is likely to come as a surprise to repayment traders in particular, who have not previously had to worry about late filing penalties.