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HMRC harmonises its Tax penalty regime

Since VAT was introduced as the UK’s sales tax back in 1973, the penalty regime used to enforce compliance has been markedly different from that of Income Tax.

Back in the day, VAT was administered by what was then Customs & Excise whilst Income Tax and the other direct taxes fell under the care and management of the Board of Inland Revenue. The coming together of these two agencies to form HM Revenue & Customs in 2005 did nothing to bring a consistent approach to compliance with VAT and Income Tax obligations until now.

HMRC had a stated objective to change the existing regime and roll out a new combined penalty regime which is ‘simple, fair and effective to protect public finances by incentivising compliance and to strengthen confidence in the tax system’ They explained explain that the new approach would penalise the small minority who, it claimed, did not take their tax compliance seriously. Those individuals and businesses who persistently missed filing and payment deadlines face more rigorous penalties compared with those who make the occasional accidental error.

HMRC applied the new penalty rules for VAT from periods beginning 1st January 2023 and for income tax from a later date. Therefore, in this article we look at the changes from a VAT perspective. How have HMRCs changed the VAT penalties? HMRC have introduced the following measures:

Late submission of tax returns

A new points-based penalty replaced previous penalties (known as the Default Surcharge for VAT. When a taxpayer misses a submission deadline, they will incur a penalty point. Once a penalty threshold has been reached, a fixed penalty of £200 will be issued for every missed submission until a period of compliance (where all returns are submitted on time) allows the accumulated points tally to be reset to zero.

  • For annual submissions (VAT Annual Accounting) the threshold is 2 points and requires a 24 month period of compliance for the points to reset.
  • For Quarterly submissions (most VAT returns) the threshold is 4 points and requires a 12 month period of compliance for the points to reset.
  • For Monthly submissions (monthly VAT returns) the threshold is 5 points and requires a 6 month period of compliance to reset.

For the points to be reset to zero, as well as the necessary period of compliance that follows the last missed submission, all returns within the previous 24 months must be filed and up to date. In common with the old regime, there remains a right of appeal against the penalty on the grounds of ‘reasonable excuse’ – a limited list of reasons outlined in legislation.

Late payment penalties

Previous late payment sanctions were replaced. The new late payment penalty consists of 2 charges:

  • No penalty is chargeable on tax paid up to 15 days after the due date.
  • A 2% penalty is chargeable on tax paid between 16 – 30 days after the due date.
  • 4% on chargeable tax unpaid after 30 days.
  • A further 4% annual penalty rate will be chargeable on outstanding tax due after 30 days.

HMRC have indicated that they will apply a ‘light-touch’ approach to the new penalty regime at first, as well as confirming penalties will stop accruing where a time to pay agreement is reached. Again, no penalty is payable if the taxpayer has a reasonable excuse and HMRC has discretionary powers to reduce or waive penalties in appropriate circumstances.

Interest harmonisation

Interest will accrue on any late payment from the tax due date until the date payment is received. VAT repayment supplement is replaced with Repayment Interest. This is paid from the later of either the due date of the Return, or the date the Return is submitted.


The drive towards Making Tax Digital appears to be the main focus for HMRC and the new penalty integration followed in its slipstream. PayStream's accounting clients, if VAT registered businesses were subject to the new VAT penalty regime from May 2023. The new penalty regime will take time to settle in and there will undoubtedly be uncertainty as to its application in the early days. If you, would like further information or advice, then we would recommend that you speak to your accountant.

If you feel that your existing accountant isn’t providing you with the right level of advice and guidance PayStream's limited company accountancy services are designed to give you everything you need, and nothing you don't. Call us on 0161 923 0201 (option 2) or email

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