VAT is one of the more complex aspects of the UK tax regime, so it’s natural to be worried about making mistakes, especially with a new VAT penalties system since January 2023.

But did you know that there are lots of ways to mitigate the risk of having to pay VAT penalties? No? Don’t worry, we explain everything you need to know in this article.

VAT penalties

At the beginning of 2023, a new VAT penalty system replaced the old VAT filing and late payment penalty system. The new regime includes two separate elements: one for late submission of VAT returns and one for late payment.

Both are based on a points system very similar to penalty points on a driving licence: collect too many until you reach a certain threshold, and then a penalty will apply.

Penalty points for late VAT returns

According to HMRC rules, for every VAT return that you do not file on time, you will receive a single penalty point. How many points you need to rack up before a penalty applies depends on your accounting period as follows:

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

Initial VAT penalties are £200; every subsequent late return will also incur a £200. To reset the ‘penalty clock’, you have to be on time with your returns for a significant period of time: six months for monthly returns; 12 months for quarterly returns; 24 months for annual returns.

Some returns are exempt from the points system, though, including your first and last ever VAT return.

Penalties for late payment

Penalties for late VAT payments are a little more complicated to explain, with two different types of penalties applying: fixed and daily penalties.

Here’s how it works:

  • You will not receive a penalty if you make a payment up to 15 days after the payment deadline.
  • You will pay a fixed penalty of 2% of the outstanding amount if your payment is between 16 and 30 days late.
  • You will pay a fixed penalty of 4% of the outstanding amount if a payment is 31 days late or more.
  • After day 31, you will also have to pay a daily penalty of 4% per annum of the outstanding amount. So, a VAT bill that is paid 13 months laid will attract a total penalty of 8%, made up of a 4% fixed penalty and a daily penalty of 4% over the year.
  • HMRC also charges late payment interest, also known as default interest, from the first day, charged at the Bank of England base rate plus 2.5%.

Tips for avoiding VAT penalties

Keep accurate records

There are many ways to stay up-to-date with your VAT obligations, beginning with keeping detailed and well-organised records of all transactions, including receipts, invoices and any other VAT-related documentation.

Taking the time to make sure you’ve recorded everything properly and that all data is readily accessible when you need it will make it easier to prepare and file your returns.

Implement software solutions

Every VAT-registered business must use software compatible with Making Tax Digital for VAT to keep VAT records and file their returns. Such software can also streamline the VAT process by automating tasks, generating VAT invoices and preparing returns. It will also remind you when returns and payments are due.

File on time, even if you can’t pay

If you know you can’t make a payment, you should still file your VAT return on time to avoid the £200 late filing penalty. Then, contact HMRC as quickly as possible – they will try to help you, seeing how you are doing your best to comply.

Get professional help

VAT is a complex tax, so it’s easy to fall behind and face the prospect of a penalty. If you leave it to a VAT specialist, they’ll be able to help you with the details so you can file and pay on time.

At James Scott, we can help you with your VAT returns. We’ll make easy work of it – helping you to avoid VAT penalties and get back to your core business functions. All you need to do is reach out to us.