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UK: Updates in Penalties and Surcharges

From the beginning of 2023, the UK will have a new penalty and surcharges system in response to late VAT return submissions and payments. It has been made clear that missing VAT deadlines will now result in very probable penalties or surcharges.

According to the information released by the HMRC, the default surcharge system applicable to registered VAT payers will cease to exist from 1 January 2023. This regime will be replaced by updated penalties and surcharges—interest charges.

The updated penalties system sends a signal that more compliance is expected from the taxpayers as the penalties and surcharges will become more likely. The main change in the regime comes from separating penalty systems for VAT submission and VAT payments. Prior to the amendments, there was a single surcharge regime for both cases when a taxpayer missed the submission deadline or was late paying the VAT due.

Traditionally, there were no penalties for late VAT returns if the VAT due was paid on time. If the payment did not come on time, HMRC used to impose a 12-month surcharge period with interest applied on the VAT due based on the company’s turnover and history of missing VAT payments. The new system will tackle that by imposing penalties for skipping one deadline.

Based on the changes, even when the VAT due is zero, a penalty can occur whenever a reporting deadline is missed. A new points system will be imposed, meaning that each late submission generates a penalty point, and exceeding the stated threshold results in a penalty—of GBP 200 for each missed deadline.

Penalties on late VAT payments will depend on how long the payment is overdue, with a grace period of 15 days and possible agreements with HMRC on delaying payments. The initial penalty will be 2% of the VAT due, with later than 30 days delays resulting in a 4% penalty.

There is some good news, too. Based on its efforts to roll out the changes smoothly, in 2023, HMRC will not charge the first late payment penalty if the payment is made in full within 30 days after the stated deadline.

Want to stay compliant and never worry about missing a deadline? Collaborate with us! We’re experienced European tax compliance experts.

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