Most directors carry an out-of-date map of what a late VAT return costs. The default surcharge that ran for years, a single percentage bolted onto the VAT you owed, was scrapped for VAT periods starting on or after 1 January 2023. Its replacement began at lower rates: 2% at day 15, a further 2% at day 30, then a daily annualised 4%. The current 3%/3%/10% rates have applied since 31 May 2025 under SI 2025/589, for accounting periods beginning on or after 1 April 2025. If your instinct about the penalty comes from the old regime, it is now wrong, and usually wrong in HMRC’s favour.
The system that replaced it splits one problem into two. Filing your return late is penalised separately from paying your VAT late, on entirely different clocks. You can be fully paid up and still collect a filing penalty, or file on the exact day it is due and still watch a payment penalty build.
From the office-holder’s chair, that split matters because the two clocks compound. We act for directors whose VAT arrears have already crossed from a filing nuisance into a solvency question, and the point where that happens arrives earlier than most people expect.
How the VAT Penalty Regime Changed in January 2023
The old default surcharge applied a rising percentage to any late return or payment, escalating with each further default inside a rolling surcharge period. One system, one charge, triggered by lateness of either kind.
Since 1 January 2023, that single charge has been replaced by three separate mechanics that run at the same time: a points-based penalty for late submission, a tiered penalty for late payment, and interest calculated independently of both. The framework sits under the Finance Act 2021 and applies to VAT periods beginning on or after that date.
The new regime is not softer. It is more forgiving of a one-off slip and markedly less forgiving of a habit. Knowing your VAT filing and payment deadlines is now the difference between a clean record and a points balance that turns into cash penalties.
Penalties for Filing a Late VAT Return (Points System)
Every VAT return you submit after the deadline earns one penalty point. Nothing is charged for the first points. Once you reach the threshold for your filing frequency, HMRC charges a flat £200 penalty, and a further £200 for each subsequent late submission while you remain at the threshold. No point or penalty arises if HMRC, or on appeal the tribunal, accepts that you had a reasonable excuse for the late return, and you can appeal against either.
The threshold depends on how often you file:
- Quarterly filers: 4 points, the standard position for most businesses.
- Monthly filers: 5 points.
- Annual filers: 2 points.
Points do not sit on your record forever. Below the threshold, each point expires 24 months after the month in which the return was late. Once you reach the threshold, the points only reset after a period of compliance: 12 months for a quarterly filer (four returns on time), six months for a monthly filer and 24 months for an annual filer, and only if every return due in the previous 24 months has been filed. Miss a deadline while you sit at the threshold and you pay another £200.
Penalties for Paying VAT Late After You File
File on time but pay late and you face a different penalty entirely, one that escalates the longer the debt sits unpaid. For VAT periods beginning on or after 1 April 2025, the tiers work like this:
| How late the payment is | What HMRC charges |
|---|---|
| Up to 15 days overdue | No penalty, but interest runs from the first day the payment is late. |
| 16 to 30 days overdue | A penalty of 3% of the VAT still owed at day 15. |
| 31 days or more overdue | A further 3% of the VAT owed at day 30, taking the first penalty to 6%. A second penalty then accrues daily at an annualised 10% on the balance outstanding. |
The dates to circle are day 15 and day 30. This is the tier that catches directors who assumed a lapsed direct debit or a short cash gap was a private matter between them and their bank.
It is not. By day 31 the first penalty has reached 6% and a second penalty is accruing daily. In the cases we handle, this is where a manageable VAT bill quietly turns into an unmanageable one. If you cannot pay your VAT in full, the response you make in the first fortnight decides how much this costs.
No late-payment penalty is due if HMRC, or on appeal the tribunal, accepts that you had a reasonable excuse, and you can appeal against any penalty charged. A shortage of money does not count as a reasonable excuse unless events outside your control caused it.
How Late Payment Interest on VAT Is Calculated
Interest sits on top of the penalties, not inside them. HMRC charges late payment interest at the Bank of England base rate plus 4%, accruing daily from the due date until the bill is paid in full.
The rate is not fixed. HMRC updates its published rate shortly after a change in the Bank of England base rate, so a rate rise reaches your VAT debt within a few weeks. Interest is also not a penalty you can argue away on reasonable-excuse grounds. It is simply the price of time, and it runs whether or not you are disputing anything else.
What Happens If You File No VAT Return at All
Filing nothing does not buy you quiet. If you fail to submit a return, HMRC issues a VAT notice of assessment of tax, an estimated bill built from your trading history. The power to raise it comes from the Value Added Tax Act 1994.
HMRC must make that estimate to the best of its judgment, and it can come out higher or lower than the true figure. If it is too low, you must tell HMRC within 30 days of the assessment or risk a penalty. In our casework the assessment is a prod, not a settlement. It does not pause anything: you still collect late-submission points and late-payment penalties on the amount HMRC has estimated, so ignoring the return leaves you paying penalties on a figure you did not even set.
Penalties for Inaccurate VAT Returns
A return filed on time can still cost you if the figures are wrong. Where a VAT return contains a careless or deliberate inaccuracy, HMRC can charge a separate penalty of up to 30% of the tax underpaid for a careless error, up to 70% for a deliberate error that is not concealed, and up to 100% for a deliberate and concealed error. How you disclose the error then reduces the penalty within that ceiling.
These inaccuracy penalties run under Schedule 24 of the Finance Act 2007 and sit entirely apart from the late-filing and late-payment tiers. The practical lesson is blunt: if you spot your own error, correcting it before HMRC finds it is almost always the cheaper route, because unprompted disclosure pulls the penalty down.
When we review a director’s VAT history, an unforced correction is one of the first things we look for.
Acting Before Late Payment Penalties Build Up
The arithmetic in this new regime rewards early movement more sharply than the old one ever did. If you propose a Time to Pay arrangement before the end of day 15 and HMRC agree it, even after day 15, no first late-payment penalty is charged. Break the arrangement and HMRC can charge that penalty as if it had never been agreed.
Propose it between day 16 and day 30 and, once HMRC agree it, it holds your penalty at 3% rather than letting it double to 6%, again only while you keep to it. After day 30, both 3% charges have already landed and the second penalty is building up day by day at an annual rate of 10%. A Time to Pay proposal that HMRC agree still stops that second penalty from the day you made the proposal, as long as you keep to the arrangement.
That is why the honest advice is to open the conversation before a penalty notice arrives, not after. Waiting for the letter is the single most expensive habit we see in VAT cases, because by then the penalties are building and the room to negotiate has shrunk.
AABRS® acts as licensed insolvency practitioners. Where your VAT arrears are no longer a one-off, our team can open the HMRC Debt Management conversation, negotiate a Time to Pay arrangement, and model honestly whether the business can absorb the debt or needs a formal rescue process. Call us on 0208 444 3400 or use our contact form to talk it through before the next deadline passes.
Frequently Asked Questions About Late VAT Returns or Payments
What is the penalty for submitting a VAT return late?
Each late return earns one penalty point. You are charged a flat £200 once you reach the threshold for your filing frequency: 4 points for quarterly filers, 5 for monthly, and 2 for annual. Every further late submission while you sit at the threshold adds another £200, until a run of on-time returns clears the points.
What is the penalty for paying VAT late?
For VAT periods beginning on or after 1 April 2025, there is no penalty in the first 15 days, though interest runs from day one. Between 16 and 30 days you are charged 3% of the VAT still owed at day 15. From 31 days a further 3% of the amount owed at day 30 applies, taking the initial penalty to 6%, and a second penalty then accrues daily at an annualised 10% on the outstanding balance. Periods that began between 1 January 2023 and 31 March 2025 carry 2%, a further 2% and an annualised 4%.
Does interest apply on top of VAT penalties?
Yes. Interest is charged separately from the penalties, at the Bank of England base rate plus 4%, and it accrues daily from the due date until the bill is cleared. HMRC updates its published rate shortly after a change in the base rate, so a rate rise feeds through to your debt within weeks.
What happens if I do not file a VAT return at all?
HMRC issues a VAT notice of assessment of tax, an estimate of the VAT due made to the best of HMRC’s judgment. It can be higher or lower than the real figure, and if it is too low you must tell HMRC within 30 days of the assessment or risk a penalty. It does not stop the penalty clock. You still incur late-submission points and late-payment penalties on the estimated amount, so filing the correct return is almost always cheaper than leaving the assessment to stand.
Can a Time to Pay arrangement stop the late payment penalty?
Timing is everything. A Time to Pay proposal made before the end of day 15, and agreed by HMRC even if later, stops the first late-payment penalty. Proposed between day 16 and day 30 and agreed, it holds the penalty at 3% rather than 6%. Break the arrangement and HMRC can charge the penalty as if it had never been agreed. After day 30 both 3% charges have already applied, so the earlier you approach HMRC, the less the arrears cost you.