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Tax 2023: Prepare for the new penalty rules

In January 2023, HMRC’s new late VAT return and payment penalty system will be in place. Here’s what you need to know about the new rules.

Out with the old, in with the new

Under the current system, you can be charged a financial penalty (surcharge) if you’re late with your VAT return or payment by HMRC. If this is a first or even a second offense HMRC will usually not fine you but give you a suspended sentence. However, if you’re late again within a period of time you’ll be fined. From January 2023 the new system separates the penalties for late payments and late returns.

Late Payments

HMRC will charge interest on any unpaid portion of your VAT bill beginning the day after it was due under the new regime. If you pay by direct debit, interest begins one month and eight days after the VAT return period ends. It is calculated for each full day that any VAT is overdue. It is calculated at the Bank of England base rate plus 2.5% per year on the amount owed.

Late returns

From in January 2023, HMRC will issue a penalty point for each late return, but you will not be fined until your points reach the penalty threshold. The threshold varies depending on how frequently you are required to submit returns: five points for monthly returns, four points for quarterly returns, and two points for annual returns. A penalty point is removed from your record after two years. So, if you maintain a clean slate for two years, you will have no points against you. The deadline for filing your returns remains unchanged. Payments are due one month and seven days after the end of each VAT return period.

How much?

Unlike the current surcharge system, the penalties will not increase as you submit more late returns. Instead, once you reach the threshold, you will be charged £200 for each late return, regardless of whether you owe VAT or not.


Penalties only apply to returns, as opposed to the current system, where you can be surcharged if you are late with either your VAT return or your payment. That means that even if you can’t pay your VAT bill, you should be able to submit your return on time. You’ll only have to pay interest until you pay off your debt.


Late payments will incur interest but not a penalty. Penalties will only be imposed for late returns. Each time you are late, you will receive a penalty point, but a fine (£200 per late return) will only apply once the points reach the threshold, which is four points for quarterly returns.

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