VAT Penalties

The New VAT Penalty Regime

From 1 January 2023, HMRC introduced a new penalty system for VAT returns that replaced the previous default surcharge. The new regime separates penalties into two distinct categories:

• Late submission penalties based on a points system
• Late payment penalties calculated as a percentage of unpaid tax

This system applies to all VAT-registered businesses, whether registered voluntarily or because they exceeded the VAT registration threshold.

Late Submission Penalties

Under the points-based system, each late VAT return adds one penalty point to your record. Once you reach the penalty threshold, you receive a £200 penalty for that late return and for every subsequent late return.

Penalty Point Thresholds

The threshold depends on your VAT return filing frequency:

A business filing quarterly returns would accumulate points over time and only receive a financial penalty upon reaching 4 points. Each late return after that also triggers a £200 penalty.

Resetting Your Points

You can reset your points total back to zero by meeting both conditions:

1. You submit all returns on time for a set period of compliance
2. You have submitted all outstanding returns for the previous 24 months

The period of compliance depends on your filing frequency:

Late Payment Penalties

Late payment penalties apply when you do not pay the VAT you owe by the due date. The penalty is calculated based on the amount of VAT outstanding and how late the payment is.

The first penalty is charged at day 16 if any VAT remains unpaid. The second charge is calculated at day 31, and after that a daily penalty accrues until the balance is paid. The percentages are set by the government and were increased from 1 April 2025; HMRC publishes the current rates in its guidance on late payment penalties for VAT.

Time to Pay Arrangements

If you contact HMRC before day 16 and agree a Time to Pay arrangement, no late payment penalties will apply provided you stick to the agreed schedule. This is an important safeguard for businesses experiencing temporary cash flow difficulties.

Interest on Late Payments

In addition to penalties, HMRC charges late payment interest from the day after the payment due date until the date you pay in full. The interest rate is a fixed margin above the Bank of England base rate, so it moves whenever the base rate changes. HMRC publishes the current rate in its interest rates for late and early payments.

HMRC also pays repayment interest when it is late in making refunds to you. Repayment interest is also linked to the base rate but is set lower than late payment interest.

Reasonable Excuse

You will not receive a penalty point or a late payment penalty if you have a reasonable excuse for the failure. HMRC considers each case individually, but examples include:

• Serious illness or bereavement
• A fire, flood, or other unexpected event
• HMRC systems or postal failures
• A genuine error despite taking reasonable care

Relying on an agent or adviser who fails to submit on time is not generally accepted as a reasonable excuse.

Interaction with Making Tax Digital

The penalty regime works alongside Making Tax Digital requirements. Businesses must still use MTD-compatible software to keep digital records and submit VAT returns. Failure to comply with MTD obligations can result in separate penalties of up to £400 per return.

Practical Steps to Avoid Penalties

• Set up calendar reminders at least two weeks before each filing and payment deadline
• Use direct debit for VAT payments so HMRC collects the amount automatically after filing
• File your return even if you cannot pay — the late submission and late payment penalties operate independently
• Keep your MTD software updated and ensure digital links are maintained
• Contact HMRC early if you anticipate difficulty paying, and request a Time to Pay arrangement before penalties begin

How to Check Your Penalty Points

You can view your current penalty points total through your VAT online account on the HMRC website. The points balance, any penalties issued, and your compliance period status are all visible in the penalties and appeals section.

If you believe a penalty has been applied incorrectly, you can request a review by HMRC or appeal directly to the First-tier Tribunal (Tax Chamber) within 30 days of the penalty notice.

Comparison with the Old System

The previous default surcharge regime imposed escalating percentage surcharges (from 2% to 15% of VAT owed) for repeated late payments. The new system is designed to be fairer by giving businesses a chance to accumulate points before financial penalties apply, while also separating submission behaviour from payment behaviour.