When are late penalty points wiped off HMRC’s system?

Two separate regimes

For VAT periods beginning on or after 1 January 2023, two separate VAT penalty regimes took effect, one for late VAT payments and the other for the submission of late returns. You need to treat the two systems as completely independent, i.e. there is no overlap.

For late returns, you will incur a penalty point for each late return submitted by your business, and then incur a £200 VAT penalty when you reach your points threshold. This is four points if you submit quarterly returns; two points if you use the annual accounting scheme; five points if you submit monthly returns.

You will get a £200 penalty for the period when you reach your points threshold, not the following period. Repayment and nil returns are both subject to points and penalties.

There is a cash-flow advantage in submitting your repayment returns on time. Why not consider if you can submit them before the deadline dates to get your repayments even quicker?

Submit returns on time for a year

If you’ve reached your points threshold and incurred a £200 penalty, you must avoid making any more late submissions because you will incur a further £200 penalty for each subsequent offence. However, you can wipe the slate clean and return to zero points if you meet two conditions:

• you must submit all returns on time for twelve months after reaching the relevant points threshold. This period extends to 24 months if you submit annual returns and six months for monthly returns; and
• all your returns for the previous 24 months have been submitted.

Example. Surveyor Sam submitted his 2023 quarterly returns late and incurred a £200 penalty for the December 2023 period when he reached the four points threshold. He must submit all returns on time until December 2024 (the next four returns) otherwise each late return will incur a further £200 penalty. If he has a clean slate until December 2024, and has also submitted all returns for the previous two-year period, he will return to zero points again.

Points wiped off after two years

Imagine the following situation: you submit three late quarterly returns in 2023, so do not incur a penalty because you have not reached the four points threshold. You then have a long period of compliance and do not submit another late return until 2026. Does that mean you will get a £200 penalty in 2026 because you have now reached four points?

Good news - HMRC’s computer system will automatically wipe all points from your account when they are two years old. This common-sense approach is intended to prevent historic failures and occasional recent failures awkwardly combining to cause a financial penalty. So, by the time you submit your late 2026 return, you will be down to zero points again, so will incur no penalty.

You can appeal against any penalty point issued by HMRC if you had a reasonable excuse for submitting a late return, e.g. due to serious illness or bereavement.