Understanding VAT penalties is essential for every VAT registered business in the UK. Since the new penalty regime launched on 1 January 2023, HMRC applies separate penalties for late submission and late payment of VAT, replacing the old VAT default surcharge.
VAT penalties now fall into two main categories: late submission penalties (a points based system) and late payment penalties (time-based), both applying to most VAT returns from January 2023 onwards.
The first late payment penalty starts at day 16 after the due date, with further financial penalty charges and late payment interest added if VAT remains unpaid after 30 days. Late VAT returns earn penalty points; reaching the penalty point threshold for your accounting period leads to a £200 penalty, with £200 for every subsequent late submission.
In this guide, we break down how the rules apply, what they cost, and how to stay compliant. For more accurate and personalised guidance, get in touch with The Taxcom for efficient tax solutions and expert compliance support. Our team can review your VAT history, correct errors, negotiate with HMRC, and help prevent or reduce VAT penalties going forward.
Overview of VAT Penalties in the UK
For VAT accounting periods starting on or after 1 January 2023, HMRC replaced the old default surcharge with a new system that separately covers late submission of VAT returns and late payment of VAT. Late payment interest is charged in addition. VAT penalties in the UK target businesses failing to meet their VAT obligations, including failure to register for VAT when turnover exceeds £90,000. Businesses close to the threshold should familiarise themselves with current VAT registration requirements so they can register on time and avoid compliance issues. Understanding the process for UK VAT registration can help businesses avoid penalties linked to late or missed registration.
The new rules apply to most VAT returns, including payment, repayment returns and nil returns, for VAT accounting periods beginning on or after that date. Under the old system, there were no penalties for nil or repayment returns. Key terms used throughout this article:
- Accounting period: your return interval (monthly, quarterly or annual).
- Due date: the legal deadline for submitting your VAT return and paying any VAT liability.
- Late submission: filing a VAT return after the due date.
- Late payment: not paying VAT due in full by the payment deadline.
How Late Submission VAT Penalties and Points Work
The new system uses a points-based approach for late submissions that targets repeated late filing rather than isolated mistakes. Each late VAT return incurs one point for VAT late filing penalties. Once you reach a certain threshold, a £200 financial penalty is charged. Every subsequent late submission after that triggers an additional £200 penalty.
These HMRC VAT penalties apply even where the return is a nil return or a repayment return. Having no overdue tax to pay does not mean there is no risk. However, some types of VAT returns are exempt from the points regime, as we explain below.
The Penalty Point Thresholds for Different Accounting Periods
Thresholds depend on the frequency of VAT return submissions:
| Filing frequency | Penalty point threshold | Late returns before £200 penalty |
| Annual returns | 2 points | 2 |
| Quarterly returns | 4 points | 4 |
| Monthly returns | 5 points | 5 |
Worked example: A business filing quarterly returns submits three returns late, accumulating 3 points. On the fourth late submission, the threshold of 4 is reached and a £200 penalty is charged. Each further late return also incurs £200 while the business remains at or above the threshold.
If a business changes its accounting period with HMRC, the threshold and accumulated points are adjusted according to HMRC’s rules. Moving from monthly to quarterly, for example, changes the threshold but does not always reset total points.
Resetting and Expiring Penalty Points
If you have not yet reached your threshold, individual penalty points automatically expire after two years from their allocation date. Think of this as the penalty points clock running in the background.
Once the threshold is reached and a £200 penalty is charged, points no longer automatically expire. To reset to zero, you must complete a good compliance period:
- Monthly filers: 6 months of on-time returns
- Quarterly filers: 12 months of on-time returns
- Annual filers: 24 months of on-time returns
You must also ensure all outstanding returns from the previous 24 months are filed.
VAT Returns Not Affected by Late Submission Penalties
HMRC excludes certain returns from the late submission penalty points system. These include your first VAT return after VAT registration, your final return after deregistration, and any one off return covering a non-standard period (for example, following a change in submission frequency).
Although these returns are exempt from late submission VAT penalties, interest or separate penalties may still arise if tax is paid late. When HMRC opens a compliance check, understanding how VAT investigations and HMRC enquiries work is crucial to managing potential penalties and interest. We always advise treating every due date as a hard deadline for both submission and payment.
VAT Late Payment Penalties
VAT penalties for late payment are separate from late submission penalties and are based on how many days after the due date the outstanding balance remains unpaid. No late payment penalty is charged for payments 0 to 15 days late, though interest may be applicable.
From accounting periods starting on or after 1 January 2023, the structure is:
| Days overdue | Penalty |
| 0 to 15 days | No fixed penalties; interest accrues |
| 16 to 30 days | First penalty: 3% of VAT unpaid at day 15 |
| 31+ days | Second penalty: 3% of VAT unpaid at day 30, plus a daily rate of 10% per annum on the outstanding balance |
A first penalty of 2% was the original rate for payments 16 to 30 days late, but this increased to 3% from 31 May 2025. Late payment penalties start accruing after 30 days and escalate significantly. Entering a time to pay arrangement with HMRC before penalties trigger can stop further payment penalties from accruing.
Late Payment Interest on Overdue VAT
Late payment interest is charged from the first day the payment is overdue, in addition to any penalty charged. The rate is the Bank of England base rate plus 4% (previously base plus 2.5% before 6 April 2025). As of early 2026, with the england base rate at 3.75%, the late payment interest rate is 7.75% per annum.
Daily late payment interest accrues alongside fixed penalties for late VAT payments. Penalties and interest are calculated based on how long the payment is overdue. This interest applies even where a business has a pay arrangement, because time to pay pauses VAT penalties but not interest charges on the overpaid tax or outstanding tax.
Example: £20,000 VAT paid 40 days late at 7.75% interest = approximately £170 in interest alone, on top of fixed penalties.
Interest on Overpaid VAT and Repayment Interest
When a business has overpaid tax or is owed a VAT refund, HMRC pays repayment interest at the Bank of England base rate minus 1%, subject to a minimum rate of 0.5%. Interest on overpaid tax is paid at the base rate minus 1%, currently 2.75%. This is considerably lower than the rate charged for late payment, so correcting errors promptly is always worthwhile. Repayment interest does not remove any VAT penalties from earlier periods where VAT was misreported.
Transitional Rules and the 1 January 2023 Changes
The new penalty regime applies to accounting periods beginning on or after 1 January 2023. Under the old VAT default surcharge system, the old system imposed penalties starting at 2% for late payments within a 12-month surcharge period, escalating up to 15% of VAT due.
| Feature | Pre-2023 default surcharge | Post-January 2023 new regime |
| Late submission | Warning then surcharge | Points based system with £200 penalty |
| Late payment | Percentage surcharge (2% to 15%) | Fixed penalties at day 16 and day 31, plus daily penalties |
| Nil/repayment returns | Not penalised | Included in points system |
| Interest | Separate | Separate, base + 4% |
HMRC published updated guidance on 4 January 2023. For periods starting before that date, the old rules still apply. Businesses with periods straddling late 2022 and early 2023 may need to consider both other tax regimes and tax regimes.
HMRC’s “Light-Touch” Approach in 2023
From 1 January 2023 to 31 December 2023, HMRC operated a temporary concession. During this period, the first late payment penalty was waived if VAT was paid in full within 30 days of the due date. This helped businesses adjust to the new rules without immediate financial consequences for short delays. However, security verification of compliance was still expected.
This concession ended on 31 December 2023. From 1 January 2024, the first penalty applies at day 16 under standard rules. Businesses can no longer rely on this grace period and should respond to every deadline strictly. Verification successful compliance is now essential, as is awareness that the uk performing security verification of returns is part of HMRC’s digital processes. HMRC’s security service and malicious bots protections mean that when checking your online account you may see messages like respond ray id confirmations.
Time to Pay Arrangements and Reducing VAT Penalties
A time to pay agreement with HMRC can stop late payment penalties for VAT. Communicating with HMRC early can help in setting up such a payment plan, and proactively contacting HMRC can stop penalties from accruing if financial problems arise. You should contact HMRC before day 16 to maximise protection.
Late payment interest continues to run, but the arrangement significantly limits total VAT penalties. HMRC typically requests recent accounts, cash flow forecasts and details of other debts. At the Taxcom, we support clients in approaching HMRC, preparing realistic proposals and managing ongoing compliance with these arrangements.
Practical Steps to Avoid VAT Penalties
- Keep accurate records to simplify VAT return preparation and reconcile monthly.
- Automating submission via HMRC-recognised accounting software reduces human error. Use software to automate VAT record-keeping and filing.
- Submit VAT returns on time to avoid penalties. File VAT returns on time even if payment is delayed, to avoid late submission VAT penalties and show good faith.
- Review VAT calculations regularly and seek professional help from the Taxcom before complex transactions such as property or cross-border supplies, including VAT on digital services.
How the Taxcom Can Help with VAT Penalties
At the Taxcom, we are a specialist UK tax and accountancy firm experienced in handling VAT penalties, HMRC disputes and tax investigations. Our expert accountancy and taxation services cover day-to-day compliance as well as strategic planning. We review clients’ VAT records and filing history, identify where penalties have arisen or might arise, and implement practical steps to improve compliance.
We handle correspondence with HMRC regarding late submission penalties, late payment penalties, and late payment interest, including preparing appeals or making a reasonable excuse claim where justified. If you receive a penalty decision letter, we can review it and act within the 30-day time limit. We also provide VAT reviews, management accounts, and personalised tax planning so your VAT obligations are built into cash flow forecasts.
Contact the Taxcom today to book a consultation with our tax specialists. We offer a client-focused, personalised and stress-free approach to resolving VAT penalties.
Frequently Asked Questions About VAT Penalties
These FAQs cover related questions not fully addressed above. Answers reflect HMRC rules current at the time of writing. For advice on your specific situation, speak to the Taxcom.
Can VAT penalties be reduced if I correct an error voluntarily?
HMRC may reduce VAT penalties if you disclose and correct errors before they discover them, particularly where the error was non-deliberate and you cooperate fully. Voluntary disclosure generally results in lower penalty percentages than those applied after an HMRC investigation.
What counts as a “reasonable excuse” for late VAT submission or payment?
Common examples HMRC might accept include serious illness, bereavement, or major system failures. Cash flow problems alone usually do not amount to a reasonable excuse for VAT penalties. You must demonstrate the issue was genuinely beyond your control and that you acted as soon as reasonably possible.
Do VAT penalties apply to Making Tax Digital software errors?
If VAT penalties arise due to genuine software glitches outside your control, HMRC may consider this as part of a reasonable excuse claim. However, you must show you took all reasonable steps to comply, including using HMRC-recognised software and testing submissions before deadlines, especially as Making Tax Digital for VAT compliance increasingly relies on compatible software and robust digital records.
Are VAT penalties tax-deductible as a business expense?
UK tax law normally disallows fines and penalties, including most VAT penalties, as deductible expenses for corporation tax or income tax calculations. They must be absorbed as a cost with no tax relief.
What should I do if I receive a VAT penalty notice I disagree with?
Read the notice carefully, check the dates and amounts, and either contact HMRC directly or ask the Taxcom to review the position. If appropriate, we can submit an appeal or request an internal review within the 30-day time limit stated on your penalty decision letter.