VAT Penalties Have Changed: What Every Business Needs to Know

If you’re VAT-registered, missing a VAT deadline can now cost your business more than you might expect — even if you have no VAT to pay.

Since January 2023, HMRC has operated a completely new VAT penalty regime, replacing the old default surcharge system that many business owners had become familiar with over the years.

The new rules are designed to be fairer for businesses that occasionally make a mistake. However, they are also more complex, and repeated late submissions or payments can quickly become expensive.

Understanding how the system works can help you avoid unnecessary penalties and keep your business compliant.

Late VAT Returns: Understanding the Points-Based System

One of the biggest changes is the introduction of a points-based penalty system for late VAT return submissions.

Every time a VAT return is submitted after its deadline, HMRC issues a penalty point. Once enough points have been accumulated, a financial penalty is triggered.

The threshold depends on how often your business files VAT returns:

Once the threshold is reached, HMRC issues a £200 penalty. Any further late submissions after that point will usually result in additional £200 penalties.

Don’t Assume a Nil Return Is Exempt

One area that catches many businesses out is that penalties are not linked to the amount of VAT due.

Even if:

• Your VAT return shows no VAT to pay; or
• HMRC owes you a repayment;

a late submission can still generate a penalty point.

In other words, the obligation is to submit on time — not simply to pay on time.

A Practical Example

Suppose a business files VAT returns quarterly.

If it submits four VAT returns late, it will reach the penalty threshold and receive a £200 penalty. If the next return is also late, a further £200 penalty may be charged.

The system is therefore relatively forgiving of an occasional mistake but much less forgiving of repeated late submissions.

How Do You Reset Your Penalty Points?

Penalty points do not disappear automatically once they have been accumulated.

To reset your points total to zero, two conditions must be met:

1. All VAT returns due during the relevant compliance period must be submitted on time.
2. All VAT returns due in the previous 24 months must have been filed.

Both conditions must be satisfied before HMRC will remove the points from your record.

For businesses that have already accumulated points, this means that restoring a clean compliance record often requires a sustained period of good filing behaviour.

Late VAT Payments: Penalties Increase Over Time

Separate penalties apply when VAT is paid late.

The new regime is designed to encourage businesses to take action quickly if they cannot pay on time.

Days 1–15

No penalty will generally apply if you:

• Pay the VAT in full; or
• Agree a Time to Pay arrangement with HMRC

within the first 15 days after the payment deadline.

Days 16–30

If no payment or Time to Pay arrangement has been agreed, a penalty equal to 2% of the VAT outstanding at day 15 may apply.

Day 31 Onwards

Penalties increase further and are calculated using a combination of:

• 2% of the VAT outstanding at day 15;
• 2% of the VAT outstanding at day 30; and
• An additional penalty accruing daily at an annualised rate of 4% until the balance is paid or a payment arrangement is agreed.

The Key Message

If you know you cannot pay your VAT on time, do not ignore the problem.

Contact HMRC as early as possible and explore a Time to Pay arrangement. Acting within the first 15 days can significantly reduce or eliminate penalties.

Don’t Forget About Interest

Late payment penalties are only part of the picture.

HMRC also charges interest on overdue VAT from the payment due date until the balance is settled.

The rate is currently calculated as:

Bank of England Base Rate + 2.5%

For businesses with larger VAT liabilities, this can become a significant additional cost.

What Happens When HMRC Owes You Money?

The old VAT repayment supplement has been replaced by repayment interest.

This interest runs from the later of:

• The day after the VAT return due date; or
• The date the VAT return is submitted

until the repayment is made.

The repayment interest rate is:

Bank of England Base Rate minus 1%, subject to a minimum rate of 0.5%.

As a result, HMRC generally charges businesses interest at a higher rate than it pays on VAT repayments.

Key Takeaways for Business Owners

To minimise the risk of VAT penalties:

• Submit every VAT return on time, even if there is no VAT to pay.
• Monitor filing deadlines carefully and build in time to prepare returns.
• Contact HMRC quickly if you believe you may struggle to pay a VAT liability.
• Understand that penalty points accumulate over time and can be difficult to clear once thresholds are reached.
• Review your VAT compliance processes regularly to ensure deadlines are not being missed.

Need Help With VAT Compliance?

The new VAT penalty regime is more nuanced than the old default surcharge system and many businesses are still adjusting to the changes.

At SHA, we help businesses stay on top of their VAT obligations, avoid unnecessary penalties and deal with HMRC where issues have already arisen.

If you would like advice on VAT compliance, penalty points, Time to Pay arrangements or any other VAT matter, get in touch with our team. We are always happy to help.