13th January 2023HMRC updates: a new VAT Penalty Regime, changing policy for museums and galleries and new legislation to energy support schemes

In this month’s VAT Update Gerry Myton, Tax Partner, shares three key VAT updates from HMRC to pay attention to as we head into 2023. From the new VAT Penalty Regime, a new system for late payment and late submission of VAT returns, to changes to the Museum and Galleries VAT Refund Scheme and a new notice from HMRC on the VAT treatments of payments made under energy support schemes, we outline what these changes mean for you.

  1. New VAT Penalty Regime

HMRC are implementing a new penalty system for late payment and late submission of VAT returns, replacing the current default surcharge regime. This new system was due to be implemented in April 2022 but will commence on 1 January 2023. Effective from 1 January 2023, a taxpayer’s default history will be wiped clean.

Late Returns

Late submission of VAT returns will work on a points-based system. For each return filed late, the business will receive one penalty point and will trigger a penalty of £200 when the penalty threshold has been exceeded. This is dependent on the frequency of submission of returns as is set out below:

Submission frequency Point threshold
Annual 2
Quarterly 4
Monthly 5


To reset points back to zero the business must submit returns on time for the relevant period of compliance, again dependent on submission frequency as set out below:

 Submission frequency Period of compliance
Annual 24 months
Quarterly 12 months
Monthly 6 months


A new feature of this penalty regime is that it does not matter if the return is nil or a repayment, the late submission penalty will still apply.

Late Payment

Late payment penalties will depend on how late the payment is made:

  • 0-15 days late – no penalty charge
  • 16 – 30 days late – 2% of VAT owed at day 15
  • < 31 days late – First penalty at 2% on VAT owed at day 15, plus 2% on VAT owed at day 30 followed by a second penalty at 4% per year for the duration of the outstanding balance.


HMRC will charge late payment interest from the day payment is overdue to the day payment is made in full.

In addition, HMRC will be removing the repayment supplement from 1 January 2023. Instead, HMRC will pay repayment interest on any VAT owed which will be calculated from the day after the due date or the date of submission (whichever is later).

  1. Museum and Galleries – VAT Refund Scheme

Museums and Galleries that offer free admission to the public are generally not allowed to recover associated input tax as this is not seen to be a business activity. However HMRC introduced a VAT refund scheme to allow these museums ad galleries to recover input tax. The scheme was first introduced in 2001 but eligibility criteria was limited to national and university museums and galleries.

HMRC have now announced that the VAT refund scheme is now open again for applications with the closing date for this round of applications being the 1 March 2023. Application forms will need to be requested by emailing vat33a@dcms.gov.uk.

In order to use the scheme, Museums and Galleries must meet the eligibility criteria:

  • Open for the general public for at least 30 hours per week
  • Offer free entry (without prior appointment)
  • Hold collections in a purpose-built building
  • Display details of free entry and opening hours on their website
  1. Energy Bill Relief Scheme

HMRC have updated Notice 701/19 to detail that VAT treatment of payments made under the three energy support schemes which were introduced in October 2022 to support households and businesses facing rising energy bills. The three schemes include:

  • Energy Bill Relief Scheme
  • Energy Price Guarantee
  • Energy Bills Support Scheme

Payments made under the scheme are treated as grant payments for VAT purposes and are therefore to be treated as outside the scope of VAT.


To discuss your specific circumstances or any of the above areas in more detail, please contact Gerry Myton.

If you are a finance director or part of a finance team at a Not for Profit organisation, join our upcoming webinar on 21 February to hear from Gerry and our specialist tax partners on guidance and policy changes relating to VAT and Employment matters. Register here.

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