VAT penalties explained, navigating the changes

by | Nov 28, 2023 | VAT

We get how you are feeling; as a business owner, you have probably been finding it challenging to keep up with all the tax changes that are happening at the minute. But, staying up to date with tax regulations is crucial to keep your company tax compliant and to avoid unnecessary fees or penalties – nobody wants to pay those!

There have been some significant changes to Value Added Tax (VAT) penalties this year. To make understanding these changes easier for you, our team of Sheffield-based accountants at Freedom In Numbers has outlined key aspects of these changes. Now we will take a look at VAT penalties and explain how this works for you:


Introduction to VAT penalties:

Firstly, let’s start with what VAT is and who needs to pay this tax. VAT (Value Added Tax) is applied to products and services by VAT-registered businesses in the UK. Companies must register if their VAT taxable turnover exceeds £85,000, but can choose to register voluntarily. Responsibilities for companies that are VAT registered include incorporating VAT in pricing, keeping records, accounting for VAT on imports, submitting regular VAT returns to HMRC, and of course, making any necessary VAT payments.

So, what is a VAT penalty? It is a financial consequence imposed by HMRC on businesses that break VAT regulations. Anyone who submits a VAT return is subject to receiving a VAT penalty for non-compliance with VAT rules.

But what if you submit a nil VAT return or are even due a repayment from HMRC? Even those who submit a nil or repayment VAT return are liable to VAT penalties if they don’t follow the regulations. This makes it really important to follow the rules every time!

Penalties can result from late submission or payment of VAT, inaccurate returns, failure to maintain proper records or non-compliance with VAT rules. The severity of penalties varies based on the nature and extent of the violation, serving as a deterrent to encourage businesses to meet their VAT obligations. Staying informed, adhering to deadlines, and maintaining accurate records can help your company to avoid VAT penalties.

Starting this year, businesses and individuals subject to VAT face a shift in how penalty structures work. The traditional VAT default surcharge has been replaced by a new system that targets late submission of returns and delayed payments.


Understanding the points-based system:

A major departure from the previous system is the introduction of a points-based system for late submission penalties. For each late submission, a penalty point is assigned. Once a certain threshold is reached, a £200 penalty is imposed, with subsequent penalties for each additional late submission. The threshold varies based on the frequency of submissions that you opt to make. You accrue penalty points for each late submission, and upon reaching the threshold based on your accounting period, you will then incur a £200 penalty. The threshold varies according to the frequency of returns as below:


  • Annually: Threshold of 2 points within 24 months.
  • Quarterly: Threshold of 4 points within 12 months.
  • Monthly: Threshold of 5 points within 6 months.


To illustrate, let’s look at an example: consider a business submitting VAT returns quarterly. If the penalty point threshold is set at 4 points and the business already has 3 penalty points from previous late submissions, the next late submission triggers a £200 penalty.


Navigating changes in business and penalty points:

The new VAT penalty regulations exempt certain VAT returns from late submission penalties. This includes the first VAT return for newly registered businesses, the final VAT return after cancelling VAT registration, and one-time returns that cover periods other than a month, quarter, or year. For instance, if there’s a transition from submitting returns quarterly to annually, HMRC will adjust your points with a new automatic adjustment penalty threshold.

Taking over a business as a ‘going concern’ also has implications. Interestingly, penalty points accumulated by the previous owner won’t transfer to the new VAT registration number, providing a clean slate for the acquiring entity.


Appealing against VAT penalties:

If you feel that VAT penalties have been unfairly applied to you, then you can appeal against these penalties from HMRC. You’ll be offered a review by HMRC in its decision letter addressed to you. You can either accept the offer of a review or appeal to a tax tribunal.


VAT penalties explained, a conclusion:

Adapting to the ever-changing tax landscape in the UK is not easy. However, having a good understanding of how VAT penalties work is essential in order to avoid having to pay a penalty to HMRC. Staying informed about these changes ensures that you can stay compliant and avoid the risk of financial penalties.

The new VAT penalty system introduces a more nuanced approach, prioritising timely submissions and payments. By adjusting to these changes in your own business operations, you can proactively manage your VAT obligations in this new system, staying compliant, and penalty free!


Related Services:


VAT Schemes

Corporation Tax

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