New VAT Penalty Regime coming January 2023

For VAT periods starting on or after 1 January 2023 the default surcharge currently issued for late submissions and/or late payments of VAT will be changing to a point based system. This change is intended to be brought in for all taxes in time as the move to Making Tax Digital continues.

This new regime for VAT was originally due to start in April 2022 but due to the pandemic this has been pushed back 9 months.

The bad news – if a return is a for a repayment or is a nil return they will be subject to a late submission penalty point and potential financial penalties. Under the current system the surcharge is based on the return liability, if there is no liability there is no surcharge.

The good news – HMRC are going to have a soft landing for the first 12 months of the new regime, they will not charge a first late payment penalty if any outstanding payments are paid in full within 30 days of the normal payment due date.

The new point based system should remove some of the harshest impacts of the default surcharge system, whereby the same penalty is applied whether a payment is one day late or is one year late.


For each VAT return submitted late a business will receive one late submission penalty point.

Once a penalty threshold is reached, the business will receive a £200 penalty and a further £200 penalty for each subsequent late submission. As with other tax penalties, a business will not be liable to a point or penalty if they have a reasonable reason for not submitting a VAT return by the deadline.

The late submission penalty points vary according to the VAT return submission frequency.

Submission frequency 

Penalty points threshold

Period of compliance



24 months



12 months



6 months

A business will be able to reset their points back to zero if:

  • all returns are submitted on or before the due date for the period of compliance — this will be based on the submission frequency
  • when points are accrued but do not reach a penalty threshold the points will expire after 2 years



For late payment penalties, the sooner the liability is paid the lower the penalty rate will be.

Up to 15 days overdue – A business will not be charged a penalty if the VAT owed is paid in full or a payment plan is agreed on or between days 1 and 15.

Between 16 and 30 days overdue – A first penalty will be calculated at 2% on the VAT owed at day 15 if the liability is paid in full or a payment plan is agreed on or between days 16 and 30.

31 days or more overdue – A first penalty will be calculated at 2% on the VAT owed at day 15 plus 2% on the VAT owed at day 30.

A second penalty will be calculated at a daily rate of 4% per year for the duration of the outstanding balance. This is calculated up to the date when the outstanding balance is paid in full or a payment plan is agreed.



Interest will be charged on late payments from the day the payment is overdue to the day the payment is made in full. This will be calculated as the Bank of England base rate plus 2.5%.

If you are in VAT group then please ask for further information as to how the penalties will apply when a company joins or leaves a VAT group.

Also there are special rules where the frequency of reporting changes.  Again please ask.

Full guidance on the new penalty regime is expected to be issued by HMRC in December 2022.

If you have any questions or would like to speak to our team about your situation, then please get in touch! You can call on 01243 782 423 or head to our contact form!

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