Breaking Down the Changes in VAT Penalty Structure
From 1 January 2023, HMRC introduced a reformed penalty regime for VAT returns that are submitted or paid late. This new system replaced the old default surcharge rules and brought VAT penalties in line with those used for other direct taxes. The reforms were designed to be fairer by protecting businesses from heavy fines for […]
From 1 January 2023, HMRC introduced a reformed penalty regime for VAT returns that are submitted or paid late. This new system replaced the old default surcharge rules and brought VAT penalties in line with those used for other direct taxes.
The reforms were designed to be fairer by protecting businesses from heavy fines for minor delays, while still penalising persistent or serious late submissions and payments.
However, with further updates effective from April 2025, the financial impact of late compliance has increased, making it crucial for VAT-registered businesses to understand the rules in detail.
Points-Based Penalties for Late VAT Returns
Under the current system, businesses receive penalty points for each late VAT return. Once a business reaches its threshold, a £200 penalty is charged. Each additional late return beyond that point results in a further £200 fine.
Penalty thresholds:
- Annual returns – 2 points
- Quarterly returns – 4 points
- Monthly returns – 5 points
Penalty points expire after a period of compliance:
- Annual – 24 months
- Quarterly – 12 months
- Monthly – 6 months
Importantly, the new rules apply equally to repayment traders (businesses that usually reclaim VAT), who were not penalised under the old system.
Penalties for Late VAT Payments (Updated 2025)
The late payment rules were tightened further in April 2025.
- Day 1–15: No penalty if VAT is paid in full or a Time to Pay arrangement is agreed.
- Day 16: A 3% penalty is charged on any unpaid VAT.
- Day 30: An additional 3% penalty is applied if the VAT is still unpaid.
- Day 31 onwards: A daily penalty accrues at an annualised rate of 10% of the outstanding VAT until payment is made.
This represents a significant increase from the original 2023 regime, which charged 2% at day 15 and day 30, with 4% annually thereafter.
Interest on Late Payments (Updated 2025)
In addition to penalties, HMRC charges interest on overdue VAT.
- Interest is charged from the first day VAT is late.
- The rate is set at the Bank of England base rate + 4% (up from +2.5% previously).
- Interest also applies to overdue penalties.
This is not technically a penalty but is intended as compensation to HMRC for late payment.
Contesting VAT Penalties
If HMRC issues a penalty, businesses will receive a penalty decision letter. Each penalty point or £200 fine can be appealed. HMRC may reduce or cancel penalties if there is a reasonable excuse or errors in calculation.
Comparison with the Old Regime
Under the previous default surcharge rules (in place until 31 December 2022):
- Penalties were charged as a percentage of VAT owed, starting at 2% and rising to 15%.
- Even small delays could result in large fines.
The reformed system is more proportionate, penalising repeat offenders while giving protection for minor delays. However, the 2025 changes to late payment charges and interest make it much costlier for businesses to fall behind.
Key Takeaways for Businesses
- Track VAT deadlines carefully – both for submissions and payments.
- Pay promptly – even a short delay beyond 15 days can now trigger penalties.
- Use Time to Pay arrangements – agreeing one with HMRC before day 15 can prevent charges.
- Maintain good compliance – penalty points drop away after consistent filing.
- Seek professional advice if you are changing accounting periods or acquiring another business.
Bottom Line
The VAT penalty regime is now stricter than ever. While the points system is fairer for occasional mistakes, the higher penalties and interest rates introduced in 2025 mean late VAT payments can become very expensive, very quickly.
Staying compliant and seeking timely advice is essential to protect your business from unnecessary costs.
You can learn more about how you can appeal against a penalty, or how you can request a review or appeal to the tax tribunal.
Deeks VAT Consultancy
Our team at Deeks VAT Consultancy, widely acknowledged for their expertise, are ready to assist your business in keeping abreast with the most recent VAT developments. We will ensure your operations remain compliant and maintain optimal VAT efficiency.
With Deeks, you can be confident in the knowledge that your business is efficiently managing its VAT and Tax affairs across the board.
📌 For more detailed VAT analysis and to see how our VAT specialists can support your business, visit our services page or contact us today.
Contact Jane Deeks at Deeks VAT Consultancy for professional advice across all industries.
jane@deeksvat.co.uk | 07710553831 | LinkedIn