Understanding the Penalty system for MTD for VAT

Penalty System MTD

Making Tax Digital for VAT became mandatory for all VAT-registered businesses at the beginning of April 2022, and HMRC recently announced that changes to the VAT Penalty system will come into effect from January 2023.

Penalty MTD for VAT

The changes due to be made will include the introduction of a new points-based penalty system which will bring the VAT penalties for late submission and late payment in line with Income Tax and Corporation Tax.

In this blog, we take a look at the existing penalty scheme and what to expect when the changes are made.

Current penalty system

Under the current regime, penalties for late filing of VAT, as well as late payment of VAT, are dealt with using a default surcharge system, whereby HMRC records a ‘default’ if a return is filed late or a payment is made late.

HM Revenue and Customs (HMRC) record a ‘default’ if:

  • they do not receive your VAT return by the deadline
  • full payment for the VAT due on your return has not reached their account by the deadline

If you default again during this time:

  • the surcharge period is extended for a further 12 months
  • you may have to pay an extra amount (a ‘surcharge’) on top of the VAT you owe

If you submit a late return, you will not have to pay a surcharge if you:

  • pay your VAT in full by the deadline
  • have no tax to pay
  • are due a VAT repayment

The surcharge amount changes depending on how many times you miss a VAT payment, as shown in the table below:

How many times you default within 12 monthsSurcharge rate if your annual turnover is less than £150,000Surcharge rate if annual turnover is £150,000 or more
1stNo surchargeNo surcharge
2ndNo surcharge2% (no surcharge if less than £400)
3rd2% (but no surcharge if less than £400)5% (no surcharge if less than £400)
4th5% (no surcharge if this is less than £400)10% or £30 (whichever is more)
5th10% or £30 (whichever is more)15% or £30 (whichever is more)
6th or more15% or £30 (whichever is more)15% or £30 (whichever is more)

The new penalty system for VAT from 2023

The new points-based penalty system will separate late submission penalties from late payment penalties, and will apply to MTD VAT submissions for periods starting on or after 1st January 2023.

VAT Penalty Points system

Taxpayers will receive a point every time they miss a submission deadline. HMRC will notify them of each point. If a taxpayer receives enough points to reach the penalty threshold, they will be charged a £200 penalty.

The points threshold will depend on which VAT accounting scheme you are on (how often you are required to make submissions) as per the below:

How frequently do you make a VAT submission?
Penalty Threshold
Annually2 points
Quarterly4 points
Monthly 5 points

Can I still receive a late-payment penalty?

Along with the above changes to the penalty system for late submissions, there will also be new rules on late payment penalties.  The amount that a taxpayer will be charged depends on how many days overdue they are paying their VAT bill as per the below:

How many days after the due date payment is made
Penalty amount
0-15 daysNo penalty
16-29 days2% of the outstanding amount
30 days2% of what was due at day 15 plus
2% of what was due at day 30
31 days or more4% of the amount owed, calculated daily until payment is received

Time-to-Pay arrangements

To avoid a penalty, businesses will need to either pay the VAT due, or they will have 30 days to arrange a ‘Time to Pay’ agreement. Interest will also be charged from the VAT due date, until the date full payment of that tax is received.

How can Blue Spire help?

We understand that VAT can be a minefield, especially with a new penalty system on the way. Our friendly team can help simplify the VAT process and can also assist you with the preparation and submission of your returns.

MTD Penalty
If you need any support or advice regarding your business tax obligations then get in touch with us today to arrange a consultation with one of our Directors.
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