Changes to VAT – Are you ready for 2023?

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December 12, 2022

On top of the move to Making Tax Digital (MTD) and the need for VAT registered businesses to use MTD compliant software, HMRC is introducing a new penalty regime for late payment of VAT. This new regime will apply for VAT return periods starting on or after 1 January 2023; here’s everything you need to know to be prepared for it.

Currently, late VAT returns and payments are subject to the default surcharge regime – a system, like any, that has its advantages and disadvantages. All in all, it was a system designed to be more lenient for businesses with a turnover less than £150,000, which certainly wasn’t a bad thing.

For better or worse, this is now being replaced by a points based regime. Under this new scheme, a VAT registered business will receive a penalty point whenever it submits a VAT return late. Once the business reaches a threshold of points, a penalty will be charged. Those thresholds are as follows:

  • Annual VAT returns – 2 points
  • Quarterly VAT returns – 4 points
  • Monthly VAT returns – 5 points

Once the above thresholds have been reached, it’ll be a £200 penalty. There will then be an additional £200 penalty for each subsequent late submission.

It will be possible for a business to reduce its penalty points to zero. To do that, they will need to submit VAT returns on time for a set period: 24 months for businesses submitting VAT returns annually, 12 months for businesses submitting quarterly, and 6 months for businesses submitting monthly.

In terms of penalties and interest on a case by case basis, no late payment penalty will be charged where the VAT is paid within 14 days of the due date. From day 15, a penalty will be charged at 2% of the VAT outstanding, and then a further 2% at day 30. From day 31 onwards, 4% will be charged until the VAT is paid in full.

To give VAT registered businesses time to get used to these changes, HMRC has indicated it will not charge late payment penalties during 2023, provided payment is made within 30 days (however, the points based systems will apply through 2023).

That’s the long and short of it. Naturally, there are some finer details which you may want to know about – but hopefully this article has covered enough for you to know where you stand. If you have any further questions, please don’t hesitate to get in touch.

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