VAT default surcharge – penalty reform for VAT deferred until January 2023

VAT default surcharge, which was to be replaced by new late submission and payment penalties and interest from April 2022, has now been deferred until January 2023.

The announcement was made in a  written ministerial statement on 13 January 2022  by the Financial Secretary to the Treasury, Lucy Frazer, MP for South East Cambridgeshire.

As part of the Finance Act 2021, legislation was brought forward by the Government to reform penalties for late submission and late payment of tax. Initially this was to be from 01/04/2022, to align interest charges for VAT with other taxes.

These changes for VAT businesses will now be introduced nine months later, on 1 January 2023, as confirmed by the Financial Secretary to the Treasury.

The Government believes that this extra time will allow HMRC to ensure the necessary IT changes required for these new penalties and interest charges can be introduced as effectively as possible.

VAT default surcharge – what the changes will mean

The new system will bring in penalty points for late VAT returns, expiring after two years (if certain conditions are met).

This system is intended to be introduced across all taxes as HMRC continues to roll out Making Tax Digital. This new system penalises occasional late returns less, with the emphasis on higher penalties for repeated late filing/payment.

VAT default surcharge – penalty points

Taxpayers are allocated one point every time a filing deadline is missed. For late returns, these will expire after 2 years, unless the penalty thresholds have been exceeded.

A penalty is charged when the total points received equals the following thresholds:

  • Two points for annual VAT returns
  • Four points for quarterly returns
  • Five points for monthly returns

Once these points have been accumulated, a £200 penalty will be charged and all subsequent deadlines that are missed will also trigger a penalty.

Vat default surcharge and late payment charges

Fixed penalties and daily penalties will apply under the new system:

  • Payments made up to 15 days after a due date – no penalty
  • Payments made 16 to 30 days after a due date – 2% of the outstanding amount (as of day 15)
  • Payments made 30 days after a due date (or longer) – 2% of the outstanding amount from day 15 together with an additional 2% added onto the outstanding amount from day 30

In addition to this, from day 31 a daily penalty will apply. This is calculated at 4% per annum. This effectively means that 8% can be charged in tax penalties.

It is also important to bear in mind that, in addition to these penalties, interest on any overdue tax is also charged. The current rate of interest charged can be found here. This will be charged from the due date and will continue to accrue even if a time to pay arrangement has been agreed with HMRC.

Alexander & Co – expert tax and VAT advice

At Alexander & Co, we can help you navigate the complex world of VAT legislation. VAT affects all businesses and the financial penalties can be extremely high due to non-compliance. We can provide VAT specialists that will assist you with any compliance issues.


Our chartered tax advisors can assist you in reducing your tax liabilities, maximising your wealth and easing the administrative burden of tax compliance.

We are on hand to provide comprehensive and professional tax advice to clients, with our services ranging from personal to corporate tax. Contact us today on 0161 832 8481, email or complete the contact form below and we will be touch.

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