VAT penalties when payments are 31 days late or more!

VAT penalties when payments are 31 days late or more!

HMRC have updated the guidance about how to settle VAT payments which are overdue by 31 days or more when penalties come into play.

Since the VAT accounting periods starting on or after 1 January 2023, late payment penalties have applied to late VAT payments.

The previous VAT default surcharge has been replaced by new penalties for VAT which is paid late and VAT returns that are submitted late, and these changes affect everyone, who submits returns, including a nil or repayment return.

HMRC has made it clear that when a payment is 31 or more days overdue, the first late payment penalty increases, and a second late payment penalty is also issued.

The first late payment penalty is calculated at 2% of what was outstanding at day 15 plus 2% of what is still outstanding at day 30.

The second late payment penalty is calculated at a daily rate of 4% per year on the outstanding balance. This is charged every day, from day 31 until the outstanding balance is paid in full.

To stop a second late payment penalty and interest increasing, either pay the outstanding VAT debt in full or ask HMRC for a time to pay arrangement on or after day 31.

Example: payment is 31 days or more overdue for a £15,000 VAT bill.

The company pays the VAT they owe 51 days after the date it is due.

HMRC charges a first late payment penalty of £600, calculated at:

• 2% of amount outstanding at day 15 (2% of £15,000 = £300)
• 2% of amount outstanding at day 30 (2% of £15,000 = £300)

HMRC also charges a second late payment penalty calculated daily at an annual rate equivalent to 4% on the outstanding amount of £15,000 from day 31 of the payment being overdue up to and including day 51 when the company pays in full.

This works out as 21 days (£15,000 x 4% x 21 ÷ 365 days) = £34.50, making the total penalty for paying 51 days late is £634.50.

If you need help with your VAT returns or are looking for a bookkeeping service, please contact us here at Kennedys Accounting, we will be pleased to assist you.