Avoiding Penalties Under HMRC’s New VAT System

On January 1, 2023 HMRC’s new penalty system took effect for value-added tax (VAT)-registered businesses with accounting periods starting on or after January 1. This means that late penalties now apply if you submit your production’s VAT returns after the deadline for your accounting period.

How does the VAT penalty system work?

The penalty system for VAT returns is points based, which means production companies will receive one point for each late return, up to the penalty point threshold.

The penalty point threshold depends on your accounting period: 

• Monthly – five points 
• Quarterly – four points 
• Annually – two points   

Different rules apply if you have a non-standard accounting period.

How much is the penalty for late VAT return submissions?

If a production company reaches the penalty point threshold, it will receive a £200 penalty.  

Production companies will then receive an additional £200 penalty for each late submission they make while they’re at the threshold.

Are nil returns exempt?

Notably, there’s no relationship between the penalty and the value of the VAT return. This means you could still incur a penalty if you file a nil return – a key difference introduced by the new penalty system.

Can you remove points?

If you’ve reached the penalty point threshold, you can bring your tally back to zero by:  

• Submitting all returns for a prescribed period of compliance on time (e.g., six months for monthly accounting periods); and
• Submitting all outstanding returns for the previous 24 months. 

If you haven’t reached the threshold, penalty points will expire automatically.

What about late payments?

If you’re late making a payment (e.g., on your VAT return or following an amendment or correction), you may incur a penalty. The amount of the penalty will depend on how late you are in making the payment.

Late payment interest for VAT will also apply, at a rate of 2.5%.

Notably, if a production company agrees a Time to Pay arrangement with HMRC, this will be treated in the same way as a payment. As such, it’s worth reaching out to HMRC as early as possible if you envision any payment delay.

What if my accounting period started before January 1?

If your accounting period started on or before December 31, 2022, the old default surcharge regime still applies. Under this regime, HMRC will record a default on your account if you’re late submitting a VAT return or payment. If you default again in the next 12 months, you may have to pay extra on top of the VAT you owe.

Do any other penalties apply?

Yes – HMRC can also impose a penalty of 15%-100% of the unpaid amount owed if your VAT return is inaccurate.

How can Entertainment Partners help?

The team at Entertainment Partners is here for you every step of the way! We've got the tools you need to manage your UK production finances from prep to wrap, and local experts with years of industry experience to answer your questions.